Generate reliable passive income from selling a ranch in Montana

It is a popular misconception that if you opt to follow the path of 1031 exchange you cannot retain any of the proceeds from the sale of the relinquished property. This holds true only if you opt to defer 100% of the capital gains tax that has arisen after a sale. But if you are willing to pay a part of the tax then you can retain the proportionate amount of sale proceeds. There is always an option for the investor to partially invest his sale proceeds through the 1031 exchange route. This is commonly referred to as boot which most investor would like to avoid as paying away a part of your earnings as tax to the Government is not a profitable option.

So, if you are selling a Ranch in Montana, you need to be aware of the properties which are qualified for a 1031 Exchange alongside the critical factors which needs to be considered before appointing a 1031 Exchange Qualified Intermediary.

Which properties are considered as "like-kind"?

IRC Section 1031 allows sellers to postpone their tax on capital gains if the sale proceeds are invested in similar or "like-kind" properties. Now, the question is which properties should be considered as "like-kind"? Those properties that are of the same nature, class, and character can be considered as like-kind property. The quality or grade of the property is not a determining factor. While most real-estate properties can be considered as like-kind to other real-estate there are certain exceptions. Such as, real-estate properties in the US cannot be considered as like-kind to properties located outside.

Personal property and real property both qualify for exchange under Section 1031 but one cannot be exchanged for the other. For personal property exchanges, the rules are more stringent and restrictive than real property. The two most important rules relating to like-kind property for 1031 Exchange are –

• The entire total net sale price of the relinquished property must be utilized for the purchase of the replacement "like-kind" property.
• The entire equity that is received from the sale of the relinquished property must be used for the acquisition of the replacement "like-kind" property.

Taxpayers who purchase real-estate for resale or as inventory are considered as "dealers" and are not eligible for the benefits of the 1031 Exchange. However, if the taxpayer is both a dealer and an investor, he can use the 1031 section on qualifying properties.

Evaluation of critical risks for appointing Qualified Intermediary

A Qualified Intermediary plays a crucial role in ensuring a successful 1031 Exchange transaction. There are certain critical risk criteria that must be reviewed and evaluated prior to selecting a Qualified Intermediary that includes –

i) Whether the 1031 Exchange Qualified Intermediary is technically capable.

ii) Audit Controls and internal processes to safeguard the exchange assets and funds.

iii) Use of Qualified Escrow Accounts or Qualified Trust Accounts.

iv) Guidelines and decision criteria for the investment of the qualified funds.

v) Adequate protection from theft or embezzlement of the 1031 Exchange funds.

vi) Safeguard from potential omission or error by the Qualified Intermediary.

An experienced and qualified professional understands the concerns associated with selling a ranch in Montana and will be happy to discuss the issues with his clients. He will take necessary precautionary measures to evaluate the probable risks, address critical issues and implement appropriate safeguard measures to ensure successful completion of a 1031 Exchange transaction.

Solid Rock Realty Advisors, LLC specializes in helping families who are selling their farm or ranch use the 1031 exchange to defer tax on the sale of their land and purchase secure income-producing real estate investments without management duties.