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CREATING WEALTH THROUGH RESIDENTIAL & COMMERCIAL
REAL ESTATE INVESTMENTS
The Basic Understanding of 1031 Exchange
A 1031 exchange is for owners of business and investment Real Estate to sell their property and buy other like kind property without paying the Capital Gains Tax. Basically you are shifting your gain in value from one property to another and by doing so, you are differing your taxable gain to the future.
These transactions are known as deferred exchanges, or 1031 exchanges, and allow the investor to continue his investment in another property without loosing investment equity to taxes.
To have a successful 1031 exchange to happen, you will need to notify your escrow closing agent of your intent to use a 1031 exchange of the title company that you are closing with. Most title companies have experience working with 1031 exchange closing and can recommend a 1031 exchange agent or accommodator if you donīt have one set up with. A 1031 exchange will not work after the sale has closed and funded to you.
Remember, when you close on the property as a Seller, your funds are transferred to the 1031 exchange agent. They will hold your funds in an account until you have identified properties and will then transfer your funds to the closing agent for the purchase of your next investments. The cost of using a 1031 exchange agent is about $550 dollars.
Section 1031 of the Internal Revenue Code provides that no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business, or for investment.
A tax-deferred exchange is a method by which a property owner trades one or more relinquished properties for one or more replacement properties of "like-kind", while deferring the payment of federal income taxes and some state taxes on the transaction.
Property Which Does Not Qualify For A 1031 Exchange
Properties which do not qualify for 1031 tax exchanges include
A personal residence
land under development,
construction or fix/flips for resale
property purchased for resale,
inventory property.
Time Frames to Watch:
Identification Period: Within 45 days of selling the relinquished property you must identify suitable replacement properties. This 45 day rule is very strict and is not extended should the 45th day fall on a Saturday, Sunday, or legal holiday.
Purchasing period: The replacement property must be received by the taxpayer within the "exchange period" which ends within the earlier of 180 days after the date on which the taxpayer transfers the property relinquished, or the due date for the taxpayer tax return for the taxable year in which the transfer of relinquished property occurs. This 180-day rule is very strict and is not extended if the 180th day should happen to fall on a Saturday, Sunday or a legal holiday.
Replacement Property Rules:
3-Property Rule: You may identify any three properties as possible replacements for your relinquished property. More than 95% of exchanges use the 3-property rule.
200% Rule: You may identify any number of properties as possible replacements for your relinquished property as long as the aggregate value of those properties does not exceed 200% of the value of your relinquished property.
95% Exemption: You may identify any number of properties as possible replacements for your relinquished property as long as you end up purchasing at least 95% of the aggregate value of all properties identified. |
