6 1031 Exchange – Selling Rental Property while deferring Capital Gains Tax
1031 Exchange – Short Version: A 1031 exchange is a process by which a landlord can sell a rental property and with the proceeds buy another rental property while deferring the capital gains tax. Strict rules must be followed.
The following 1031 information on this website was graciously provided by Jeff Yonamine of Exchange Resources Inc.
A 1031 Tax Deferred Exchange – Long Version: A 1031 exchange is one of the last tax shelters allowed by the Internal Revenue Service. It is a transaction in which a taxpayer exchanges investment property for like-kind property and defers the payment of capital gain taxes. Like-kind property is defined by the IRS as all real property held for the productive use in a trade or business or for investment purposes. Properties which are clearly not like-kind are a taxpayer’s primary residence, vacation home and second family homes that are for personal use only.
• The exchange must be opened before the close of escrow on the relinquished (sale) property.
• The taxpayer must identify the replacement property (purchase) property within 45 days from the close of escrow of the relinquished property.
• The taxpayer must close the replacement property within 180 days from the close of escrow of the relinquished property or the tax return filing date of the relinquished property, whichever comes first.
• The taxpayer must reinvest all net proceeds into the replacement property.
• The taxpayer must obtain equal or greater debt on the replacement property than was on the relinquished property.
• The taxpayer must keep title vesting the same from relinquished property to replacement property.
• The cost for doing this is around $750.
By following these requirements, the taxpayer may shelter the capital gain taxes into the replacement property. This creates more buying power for the taxpayer versus if the capital gain taxes were paid at the time of the sale. The taxpayer gets to invest the taxes into the replacement property interest free from the IRS.
When considering an exchange, New Standard Realty and Exchange Resources, Inc. highly recommends that the taxpayer seek counsel of their CPA and attorney to obtain professional and legal advice. NSR and ERI cannot and does not provide advice regarding specific tax consequences.
Although I have personally used Exchange Resources Inc on numerous occasions, there are many 1031 facilitators available to choose from.
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