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1031
Exchanges
What is a 1031
Exchange?
A
1031 Exchange is a means of deferring capital gains taxes when
selling investment property and purchasing like-kind investment
property. Yes! Pay no tax when you sell your real estate with a
1031 Exchange. Any investor can qualify! Section 1031 of the IRS
code lets you sell your property and buy a new property without
paying any taxes. Generally,
when you sell real estate, you have to pay tax on the gain from
the sale of your property. This gain is caused either by the
property appreciating over time or by taking depreciation
deductions for tax purposes.
A
Section 1031 Exchange, named for the Internal Revenue Code
Section, offers you the major exception to imposition of this
capital gains tax. With a 1031 Exchange, when you sell business
or investment real estate and replace it with other business or
investment real estate, you can defer the payment of the tax
that is normally due on the sale.
If
your objective is to use the proceeds from the sale of your
property to buy more business or investment real estate, a 1031
Exchange can provide you with more funds for investment than can
be achieved through the investment of after-tax proceeds from
the sale of your current property.
A
1031 Exchange is not a tax loophole. It is a code section
written by Congress specifically to allow anyone who meets its
requirements to sell their property and defer paying tax on the
gain.
What
is "like-kind" property?
With
real property, like-kind means investment property for
investment property. You can exchange an apartment complex for
vacant land. The replacement property does not have to be income
producing, but it must be held for investment purposes. Personal
property exchanges must be "similar-in-use."
What
are the time limits?
From
the close of escrow on your relinquished property, you have 45
days to identify (with your accommodator) your replacement
property and thereafter, 180 days OR the date the tax
return is due (including extensions) for the tax year in
which the Relinquished Property is transferred, whichever is
earlier. These time periods run concurrently. In no event
can these deadlines be extended. You have the right to request
extensions for filing as usual, so long as the extension does
not exceed 180 days from the close of escrow.
How
do I Identify a replacement property?
You
will need to submit, in writing, your selections of replacement
properties. You can identify up to three properties (without
regard to value) or as many properties you would like (as long
as the aggregate value of all properties identified does not
exceed 200% of your relinquished property). The 95% Exception:
Automatically used if neither of the above rules apply. Simply
stated, the exchanger must acquire 95% of what was identified!
This certainly keeps people from identifying entire blocks of
potential properties!
How
many properties can I buy or sell in one exchange?
Buy
as many as you can afford and can close within the same time
period. Sell as many as you can provided they can all close
within the time period set by the closing of the first sale.
Can
my real estate agent act as a Qualified Intermediary?
Any
agent of the exchanger's is disqualified by the IRS to act as a
Qualified Intermediary as well as any related party. If in doubt
about whether or not someone is an agent or related party, if
there is a relationship by contract or blood, there is probably
a relationship that could disqualify the exchange. With
Intermediary fees so reasonable, there is no need to risk the
possible tax consequences.
6 Important
Things To Know About 1031 Exchanges
You
should keep it simple. Let the complicated part be the job of
the Qualified Intermediary. After all, they are getting paid to
handle the exchange. Let them earn their fee.
There
are however, 6 things YOU need to know about 1031 Exchanges:
-
In simple
terms, the old property and the new property must be either
bare land or rental property. If you meet this test, you can
exchange any type of real estate for any other type of real
estate.
-
From the date
of closing on the old property, you have 45 days to
determine a list of property you want to buy.
-
Also, from
the date of closing, you have 180 days to close the purchase
of one of the properties listed on your 45-day list.
-
You cannot
touch the money. By Law, the money is held by a
"Qualified Intermediary" (sometimes also called an
"Accommodator" or a "Facilitator"). You
cannot leave the proceeds in escrow until the second
property is acquired, nor can you have a friend, employee,
broker or even your CPA or attorney hold the money for you.
-
Whoever is
the title holder of the old property has to remain the title
holder of the new property.
-
To avoid
taxable gain, you must reinvest all your cash proceeds and
buy a property of equal or greater value.
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