1031 Tax Deferred Exchange
Savvy investment and business property owners can take advantage of 1031 tax exchange. When selling an investment property combined state and federal capital gains tax can be as high as 15% to 30%. That can be a nice chunk of money that can be deferred. Section 1031 of the Internal Revenue Code allows tax-deferment when taxpayer relinquishes investment property, business property or commercial property and replaces it with a like-kind property. IRS rules must be strictly followed and capital gains can be deferred or postponed when selling property. Investors have utilized the 1031 exchange in their investment strategies for taxes deferment and estate planning.
Properties That Do Not Qualify for 1031 Exchanges:
- Personal residence owner occupied does not qualify for 1031 exchanges.
- Fix and Flip Properties ( property purchased with intent of selling).
- Vacation or second homes not held as rental properties.
- There is a usage test in the tax code, paragraph 280 that may apply. Check with real estate tax expert.
Properties That Do Qualify for 1031 Exchanges: Like- Kind Properties
- An apartment building for another Apartment Building
- Single family home rental for multi-unit Apartment Building
- Shopping Center exchange for Office
- Land exchange for Shopping Center
- Land exchange for Industrial Building
- Apartment building exchange for Industrial Building
Apartment buildings can be exchanges for: single family rental unit, land, small commercial building or industrial property. Consult with tax expert when considering 1031 exchange verify “like-kind” replacement property.
General Requirement for 1031 Exchange:
- 100% if sales proceeds must be reinvested and value of replacement property must be equal to or greater than relinquished property.
- Qualified Intermediary becomes designated seller and holds all proceeds of the sale of relinquished property. Intermediary are common known as, accommodator or facilitator. Third party that helps facilitates the 1031 exchange. The qualified intermediary charges a fee.
- There is a 45 day identification period. At least three “like-kind” replacement properties must be identified in writing. There are no extensions on 45 day identification period.
- Once replacement property is selected investor has 180 days from date of relinquishment. The 1031 exchange must be completed by that date. The 180 days included the 45-day identification period.
- 200% Percent Rule: Three properties can be identified provided their combined fair market value does not exceed 200% of value of relinquished property.
1031 exchange is a technique allowed by Internal Revenue Services for investors to defer gains when selling an investment property. Tax deferred or money saved in 1031 exchange allow more money to reinvest in the new purchase property. The above information is a brief overview. This material is neither an offer to sell nor the solicitation to purchase real estate. The information is information purposes only. It is not intended to replace competent legal, tax or financial planning advice. The applicable tax codes apply to and relate to federal law only. Individual states may have their own additional tax codes. Please contact the appropriate tax and legal professional in your state. This information is provided from sources believed to be reliable but should be used in conjunction with professional advice that is consistent with your personal situation.