Under normal circumstances, when you sell a
property you have to pay tax on the gain.
Gain is caused by taking depreciation deductions
for tax purposes or by the property appreciating
in value during its ownership.
A Section 1031 tax deferred exchange, named
for the Internal Revenue Code Section it refers
to (also known as a Starker Exchange, Tax Free
Exchange, or Like-Kind exchange), allows an
exception to the capital gains tax. When you
sell your business or investment real estate,
replace it with a different business or investment
property, and complete an exchange, you can
defer payment of the capital gains tax normally
required on these sales.
If your plans include using the money from
the sale of a business or investment property
to buy more of the same, a 1031 Exchange provides
greater proceeds for your next investment-more
than you could gain through the re-investment
of after-tax proceeds.
A 1031 Exchange is not a tax loophole. It is
a section of the Internal Revenue Code, written
by Congress, to allow anyone who meets all the
requirements to sell their property and defer
paying taxes on the gain.
Understanding
an Exchange
All relinquished (old) and replacement (new)
property must be vacant land, rental property
or property used for trade, business or investment.
If the properties meet these requirements, you
may exchange any real estate for any other type
of real estate.
- You cannot have actual or constructive
control of any of the proceeds received from
the sale of the old property. By law, all
money is held by a Qualified Intermediary
(also referred to as an Accommodator or Facilitator).
You cannot have an associate or employee,
your attorney, broker or CPA hold the proceeds,
nor can you leave the proceeds in escrow until
the second property is purchased.
- You have 45 days from the date of closing
on the old property to identify a list of
properties, from which you will purchase the
new property.
- From the date of closing, you have 180
days to close on one or more of the properties
from your 45-day list.
- The titleholder on the old property must
be the same titleholder on the new property.
- You must reinvest all cash proceeds from
the sale, and purchase a new property or properties
of equal or greater value, in order to avoid
taxation on the gains.
|
