Sellers
1031 Defer Taxes
When selling a principal residence, qualified homeowners are allowed to take up to $500,000 in profits tax free. But what if you want to sell an investment property?
You can defer taxation by exchanging a qualified property for another “like-kind” property. It is called a 1031 exchange, named after IRC section 1031.
Due of the complexity and possible tax consequences of this type of transaction, consult a tax professional and /or a real estate attorney before attempting to execute a 1031 exchange
1- Can I simply sell an investment property not pay taxes on profit and buy another?
NO, to reap the tax break must be a 1031 exchange. It has to be done through an exchange agreement serviced by a qualified intermediary” according to a specific process and timetable defined by the tax code.
2- What types of property can be exchanged?
You must exchange the old property for a property of equal or greater value. If at the end of the transaction you receive any cash, you will owe capital gains taxes.
3- Is there more than one way to structure a 1031 exchange?
There are 4 basic ways :
• Simultaneous Exchange: your old property and your new property go to closing on the same day.
• Delayed Exchange: If they don’t close together. You must close or formally identify a replacement property within 45 calendar days of closing on the old property. In addition you must close on the identified replacement within 180 calendar days of the transfer of the old property or by the due date of the income tax return for the tax year which the old property was closed, whichever is earlier.
• Parking Arrangements: There are two types. Exchange: your replacement property is closed before you find a buyer for your old property. Improvement Exchange: you make improvements to a new or existing replacement property, investing the exchange proceeds.
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