What is a 1031 #tax deferred exchange?
For #real estate investors, whether they be on-purpose professionals or reluctant owners who had to hold onto a property as a rental because at the time it wasn’t selling, doing a #1031 exchange can save #investment dollars. The 1031 Tax Deferred Exchange is a frequently overlooked section of the code!
In basic terms, Internal Revenue Code, section 1031 allows a real property owner to sell his property and reinvest the proceeds in ownership of a like-kind property and defer the capital gains taxes.
A 1031 Property Exchange is also known as a Tax Deferred Exchange.
Who should consider a 1031 Exchange?
Owners of real property that upon selling will incur a net gain. Typically this is a property that has been substantially depreciated for tax purposes and/or has appreciated in fair market value), are good candidates for doing a 1031 Exchange.
The fourth and fifth category and possibly the fifth category are the type property allowed in Section 1031. The #irs defines “Business Use” as, “To hold property for productive use in trade or business.” Property retired from previous productive use in business can be qualifying property. Investment purpose defined as real estate, even if unproductive, held by a non-dealer for future use of increment in value is held for investment and not primarily for sale. Investment is the passive holding of property, for more than a temporary period, with the expectation that it will appreciate. Property held for sale in the immediate future is not held for investment.
Why should you consider doing a 1031 Exchange?
- Relocation to a new area
- Diversify. Perhaps it’s better to own more than one property
- Defer paying capital gains taxes
- Upgrade to a better property
- Consolidate multiple properties into a better single property
- Differences in growth or income potential
- A well-structured exchange can provide the real estate investor the opportunity to defer all of their capital gain taxes. The exchange in essence is an interest-free, no term loan allowed by the government
- Change in type of property residential, commercial, retail, etc.
What is “Like-Kind” Property?
An example of “like-kind” property would include commercial, condos, duplexes, raw land, rental homes (depending upon extent of personal use) and apartment buildings. The real estate needs to be within the United States and it’s possessions. #like kind means “similar in nature” notwithstanding grade or quality differences.
1031 Exchanges Can Be Done in Different Formats
- Simultaneous (2-party swap)
- Delayed exchange is most commonly done
- Multiple sales/acquisitions
- Reverse exchange
- Improvement exchange
Guidelines to Replacement Property Identification in a 1031 Exchange
- 3-Property Rule - You may identify up to 3 properties to replace your relinquished property.
- 200% Rule - The aggregate value of identified properties cannot exceed 200% of the value of your relinquished property.
- 95% Exemption - You may identify any number of properties to replace your relinquished property as long as the total value you end up purchasing does not exceed 95% of all identified properties.
Like in Life, Timing is Everything!
The time you have to sell your relinquished property and close on a new one is strictly dictated by the IRS Code.
- You have 45 days from the closing of your sale to list the properties you may want to buy. There are no exceptions to the deadline. A day counts as a day, even if it is a weekend.
- From the sale closing date, you have 180 days to close on a purchase of one or more properties from the 45-day list. Again, no exceptions to this deadline.
Watch Your Tail Feathers!
As one can imagine there are lots of Carpet Baggers out there in the world trying to remove you from your investments. Arming yourself with not just knowledge of a 1031 Exchange but also a concrete understanding of what your are doing is very important. There's lots of info to read and research, but it's constantly changing. Thus when it comes time to do your exchange be sure to partner with and expert who follows the changing legislation and monitors new legal developments.
Work with a Professional: Any real estate transaction can be confusing. Dealing with a 1031 Exchange can be mind boggling, to say the least. If you don’t have intricate knowledge or experience in dealing with a 1031, it could be very, very costly for you in the end. I have the experience necessary to make your Colorado 1031 Exchange go smoothly. For any Colorado information regarding Real Estate 1031 Tax Exchanges, please contact me Kristal Kraft at 303-589-2022. I look forward to working with you on any of your real estate transactions in the metro Denver, Colorado, area.