Russell Gullo did not have to be hit over the head to realize that a good chunk of the business he conducts as a qualified intermediary in real estate exchanges involves people forsaking the Niagara Frontier in favor of Florida and the Carolinas.
It only made sense, then, that the local guru of tax-deferred exchanges cash in on the southern flight. He's formed a new company to purchase Florida Gulf Coast condominiums, which will serve as the end properties in exchanges.
Before tales of the Sunshine State continue, a short refresher in tax-deferred exchanges.
If you own property, you know that one of the biggest hindrances to selling the land, office building, shopping plaza or big Buffalo double is the tax liability. It doesn't make sense to many people to give a quarter of the gain made on a sale to Uncle Sam and New York state.
Residential property owners were given a big boost in the wallet earlier this year when President Clinton signed the Taxpayer Relief Act of 1997. It allows married couples filing a joint return to escape capital-gains tax on profits of up to $500,000 on a primary residence sold after May 6 of this year. The limit is $250,000 for individuals -- and you can evade capital-gains tax every two years if you feel like moving.
Commercial property holders did not receive that benefit. However, still available to all is the so-called tax-deferred or like-kind exchange.
A little-known section of the Tax Code, Section 1031, permits owners of investment or business real estate to defer paying income taxes on the profit from a sale by entering into an exchange transaction through a third-party intermediary.
What happens in a 1031 transaction is this: Owners sell their investment property, and the proceeds of the sale are held in escrow by an intermediary, who rolls over the money into another property on behalf of the client. The purchased property is usually picked out by the clients ahead of time.
"You conceivably defer paying capital gains forever if you hold that property until you die, then your heirs can hold onto it," said Tim Egan, executive director of the Federation of Exchange Accommodators, a California-based trade group that represents intermediaries.
There are time restrictions with exchanges: The exchanged property must be identified within 45 days once the exchange contract is put in motion, and the exchange must be completed within 180 days.
Still, it can make a great deal of economic sense. "I'm generally in favor of tax-deferred exchanges," said David Barrett, tax partner with the Buffalo accounting firm Freed Maxick Sachs & Murphy. "The next best thing to not paying a tax is to pay it later."
Barrett pointed out that the cost of doing a tax-deferred or like-kind exchange is that while avoiding up-front taxes on the relinquished property, you usually are not allowed the usual depreciation deductions on the replacement property.
"Still, if faced with that situation, I would make the trade 99 out of 100 times," Barrett said.
The concept of "like-kind," according to IRS rules, is very lenient: an Amherst apartment building can be swapped for a Wyoming ranch, a Buffalo marina for a California warehouse, or any Buffalo investment property for a Gulf Coast condo.
Thus, Gullo has formed R.J. Gullo Properties Inc., which will buy Florida condos that local residents can invest in without the threat of capital gains levies.
"About 50 percent of my business originates in the Northeast but ends up in the Carolinas or Florida," Gullo said.
Gullo already is on the prowl for appropriate Gulf Coast condos. Among his criteria:
The property must be located between Sarasota and Naples, Fla., and be located so close to the Gulf you won't break a sweat to jump in the surf. Unobstructed water views are vital. "People are buying the water," Gullo said.
The properties must be large enough that they offer on-site, professional management and rental personnel.
Each condo must have its own laundry facilities and a screened balcony, and the complex must have a swimming pool for non-salt-water lovers.
Gullo is looking at units offering about 1,200 square feet of space, two bedrooms and two bathrooms. Prices are averaging about $250,000 apiece. The Fort Myers Beach area particularly has caught his eye.
Currently, Gullo is looking to pool money from area people, allowing his firm to buy condos with cash. "It eliminates any debt service and starts positive cash flow right away," he said.
If the idea of exchanging your block warehouse for a Gulf Coast condo catches your imagination, keep this in mind:
Remember the great things the Taypayers Relief Act did for primary residence-sellers? During the time you are holding your condo as an investment, you can use it for occasional personal stays totaling no more than 14 days per year. And, if you decide you like Fort Myers Beach so much that you would like to spend your golden years staring out at seagulls and blue waters, you can make your investment condo your primary residence condo -- allowing you, Mr. or Ms. Shrewd Real Estate Tycoon, to then take advantage of the Taypayer Relief Act of 1997 -- and shield up to a $500,000 gain once you sell the unit.
"The accumulation of wealth possible by selling every two years can be tremendous," Gullo said.
And best of all, it's been legal for 76 years.
How to find an intermediary
The Federation of Exchange Accommodators can provide a list of third-party intermediaries who are members of the trade group. The federation can be reached at:
1127 11th St., Suite 1003, Sacramento, Calif. 95814-3808
Phone: (916) 388-1031; Fax: (916) 447-6244.