Learning about 1031 exchanges.

Under normal circumstances, when you sell an investment property, you owe a property tax on the gain. Taking depreciation deductions for tax purposes causes gain or you may experience again if the property appreciates in value during its ownership. A section 1031, named for the Internal Revenue Code Section it refers to, allows an exemption to the capital gains tax. When you sell your business or investment real estate, replace it with a different business or investment real estate, and complete an exchange, you can defer payments of the capital gains tax normally required on the sales. If your plans include using the money from the sale of a business or investment property to buy more of the same, 1031 exchange provides greater proceeds for your next investment- more than you could gain through their recent investment of after-tax proceeds. A 1031 exchange is not a tax loophole. It is a section of the Internal Revenue Code, written by Congress, to allow anyone who meets all the requirements to sell their property and defer paying taxes on the gain. Also, you have to hold the property for a year and a day to have it recognized as an investment property. Otherwise, you are a dealer and have to pay capital gains tax. So 1031 exchanges do not usually work on “fix and flip” properties. With 1031 exchanges, you cannot have control of the proceeds received from the sale of the old property. By law, all money is held by a qualified intermediary. You cannot have an associate or another employee, your attorney, broker or CPA hold the proceeds, nor can you leave the proceeds in escrow until the second home is purchased. You have 45 days from the date of closing on the old property to identify a list of properties, for which you will purchase the new property

From the date of closing

You have 180 days to close on one or more of the properties from your 45-day list. The owner of the old property must be the owner of the new property. You must invest all cash proceeds from the sale, and purchase a new property or properties of equal or greater value, in order to avoid taxation on the gains. Allow a qualified intermediary to earn his/her fee and complete all the hard work for you. You can find intermediaries by searching on Google. The cost is minimal- $500 to $1000- depending on the investment property. As always tax laws may change so please consult your tax advisor. Here is a link for more information on 1030 exchanges.

John DeBrito

SOLD Real Estate Company
Phone 719 270-1167
E-Mail Soldrealestate@comcast.net