The basics are rather simple: You currently own a business or investment property and you are considering selling this property in order to purchase another investment property. Don’t just sell one, buy the next; utilize what is perhaps the Feds best program ever available for deferring your taxes on real estate capital gains, the 1031 Like-Kind Exchange.
This option gets its name from section 1031 of the United States Internal Revenue Code, which allows capital gains taxes on an investment asset to be deferred if the asset is traded for one of “like-kind.” And what, exactly, are “like-kind” assets? Like-kind simply means that they’re of the same nature or character. All real estate is considered to be of like-kind, even if one parcel is an undeveloped plot and the other is a newly built retail complex. The caveat here is that both MUST be business or investment properties. The money that you save by not paying taxes today may even be used to purchase a higher-priced and more valuable property than you might otherwise have considered. You don’t actually pay the capital gains tax until you sell the new replacement or like-kind property.
A 1031 exchange doesn’t need to be limited to a single property. With guidance from The Thomas and Drake Group and a qualified intermediary, you may be able to trade one property for two, or even swap multiple properties in what is known as a “multi-asset exchange.” The Thomas and Drake Group can help you determine what types of property can be exchanged for the one you currently own. One stipulation is that all real estate involved in the exchange exists within the United States. Another is that all properties involved are solely for business or investment purposes and do not serve as the owner’s primary residence.
While simple in concept, the 1031 exchange has some very specific details, which is why having professional guidance is imperative. Strict rules detail when the properties can be exchanged and how the exchange will be reported to the IRS. Once you relinquish your property to the new owner, for instance, you have just 45 days in which to either: (1) take possession of the new property, or (2) create a legal document that lays out the terms of the exchange, identifies each property by its official name, and is signed by the parties involved. In either case, all exchanged properties must be officially closed within 180 days or the tax benefit may be disallowed. Making sure that everything takes place within the time restraints can be tricky–especially when a multi-asset exchange is involved. This is where our professional services and the “Qualified Intermediary” come in.
The IRS says if you touch the money you pay the tax. However, if you use a qualified intermediary to transfer the money from the sold property into the purchased property, you qualify for a tax free exchange. The IRS does not permit your accountant, attorney, Realtor, Broker or escrow company to be your qualified intermediary. As a professional qualified intermediary, 1031 Exchange Advantage is a member of the Federation of Exchange Accommodators and bonded. No matter which intermediary you choose, they should be members of this important trade organization and should be bonded. Ask to see proof of both before doing business with any intermediary.
The benefits of a 1031 exchange may well be worth the time and effort. The Thomas and Drake Group can even help you come up with some creative ideas to roll the perks of a 1031 exchange into other aspects of your life. For instance, you might be able to buy a rental property in a place where you’d like to vacation; or purchase a condominium or an apartment building that can generate income. The possibilities are almost limitless.
Take time to read the information provided by 1031 Exchange Advantage on their website (click on the link to the right), and if you ask for additional information, here is our gift to you: send us a quick email first and ask us for a rewards code. This may qualify you for discounted services from 1031 Exchange Advantage.
