Section
1031 Exchanges
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 properly appreciating over time or by taking
depreciation deductions for tax purposes.
No Capital Gains Tax!
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.
Only With Investment Property
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.
Legal Opportunity
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. 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.
Six
things 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.
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.
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