Investment 1031
It’s
no secret that residential real estate is a great form of investment and a wonderful
way to put yourmoney to work for you, building equity and boosting your net
worth. There’s another benefit to realestate investing that has
helped countless people maximize real estate transactions by eliminating thefederal
capital gains tax.
It’s called a 1031 Tax Deferred Exchange, named for the Internal Revenue Code that makes suchexchanges possible. The basic premise of Tax Deferred Exchange is that you may avoid all federal capitalgains taxes from the sale of residential real estate if you use the proceeds to buy “like kind” real estateof greater value.
There are a few very important requirements that you must strictly adhere to in order to complete asuccessful Tax Deferred Exchange. At every step of the way, we highly recommend that you have accessto professional advice. A mistake could be very costly.
The most important premise for a Tax Deferred Exchange is that the seller may not receive money forthe initial sale in any way, shape or form. Instead, the seller must select an IRS-approved middlemancalled a “qualified intermediary.” The intermediary receives the proceeds of the initial sale and depositsthem in a certified bank account.
Once the first property is sold, the IRS allows 180 days to complete the Tax Deferred Exchange. Qualifiedreplacement properties must be identified within the first 45 of those 180 days, so act quickly. Whenyou have identified a qualified investment –a replacement property that is similar but more valuablethan the relinquished property, the intermediary completes the purchase and transfers the newproperty back to you.
If you follow all the steps of a 1031 investment, you will pay no capital gains taxes, saving thousands ofdollars. It’s truly a fantastic way to invest in residential real estate. Just be sure you execute every stepcorrectly and within deadline.
1031 Exchange RequirementsTimeline Requirements
Measured from when the relinquished property closes, the Exchanger has 45 days to nominate (identify)potential replacement properties and 180 days to acquire the replacement property. The exchange iscompleted in 180 days, not 45 days plus 180 days.
Identification Rules
As an Exchanger, you are required to provide in writing an “unambiguous description” of the potentialreplacement property prior to midnight on the 45th day (after the close of the first relinquishedproperty). A legal description or property address will suffice. If you wish to identify or purchase multipleproperties, you must follow one of the following guidelines:
- Identify up to three properties of any value with the intent of purchasing at least one.
- Identify more than three properties with an aggregate value that does not exceed 200% of the market value of the relinquished property.
- Identify more than three properties with an aggregate value exceeding 200% of the relinquished property, knowing that 95% of the market value of all properties identified must be acquired.
A submitted purchase agreement is considered a sufficient identification.
Any property purchased and closed within the 45-day time period qualifies as identification.
