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1031 Tax Deffered Exchanges

Thanks to the “1031 Tax Deferred Exchange” real estate investors can essentially exchange investment property for a rental cottage at the beach and defer paying taxes on the realized gain until the property is sold in a subsequent taxable transaction.  The secret is knowing what type of property you may exchange, and staying within the proper time constraints.You must “identity” your replacement property within 45 days from the close of your first property and close on the replacement property within 180 days.  Sound confusing?  It’s not.  Give us a call and we’ll walk you through the process.

We even have information on a Reverse 1031 Tax Deferred Exchange (when you buy first, then sell.)  Sound complicated?  It can be – that’s why we’ll put you in touch with the expert 1031 exchangers.

The Six Basic Rules for a successful exchange are:

  1. Held for Investment – Property must be investment property – i.e. rental property, office building, apartment, vacant lot, mini-warehouse, strip mall and more. (NOT YOUR HOMESTEAD!)
  2. IRS Requires Qualified Intermediary (QI) – A professional intermediary facilitates the exchange.  (Don’t worry.  We can put you in contact with the experts).
  3. 45 Days – You have 45 days from the closing of your relinquished investment property to pick out your dream condos/home.
  4. Avoid Receipt of Sale Proceeds – You cannot accept the proceeds from the sale.  This money goes into an escrow account until you close on the replacement (new) property.  It is imperative that your hands not touch the proceeds! (unless you want the proceeds to be taxed!)
  5. Trade Equal or Up – Equal value and equity. If you buy something less in price, you will pay taxes on the portion you did not roll into the new property.
  6. 180 Days – Your new property must be closed within 180 days of the close of the relinquished property.
3 Comments Post a comment
  1. The Graytongirl has stated the basic 1031 requirements. A couple additional rules include the taxpayer or titleholder who sells is the taxpayer or titleholder who buys known as the same taxpayer requirement. Another rule is if the property is sold to a related party, then the it cannot be sold for two years, otherwise the tax deferred is triggered. The replacement property cannot be purchased from a related party, unless the Seller is also initiating an exchange.

    Nonresident aliens can also defer capital gains taxes in a 1031 exchange. They must also comply with the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) when selling United States real estate.

    I hope this helps your readers.

    August 20, 2011
    • Thank you Andy. I am glad you mentioned nonresident aliens. Our market has many Canadian buyers and often our tax rules and regulations especially the 1031 requirements are confusing to our foreign buyers.

      September 21, 2011
  2. Whenever a nonresident is selling real estate, 10% of the sales price must be withheld. Withholding may be eliminated if a withholding certificate is secured from the IRS by the transferee (Buyer) or transferor (Seller) prior to the closing. No withholding is required if transferee is acquiring the real estate for use as the transferee’s residence and the sales price is less than $300,000.

    In a 1031 exchange, the qualified intermediary is considered the transferee and obligated to withhold the 10% and comply with FIRPTA.

    Withholding certificates are obtained from IRS Philadelphia Service Center. Form 8288 is used to pay the withholding tax.

    September 21, 2011

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