A 1031 like-kind exchange is a tax planning tool for deferring tax on capital gains. You can sell an investment property and reinvest the proceeds in a new property. This essentially postpones the tax liability from the sale.
The term “like-kind” refers to the nature or character of the property. There is a wide variety of property types that you could consider to be like-kind as long as they qualify as investment type properties.
A good example is an investor who owns a small shopping center in Windham valued at $1 million. The investor has held this rental property for many years and has accumulated substantial appreciation. Now, the investor wants to diversify his/her portfolio, and they’re eyeing a mobile home park in North Windham for $1.5 million as they see considerable upside potential.
The investor decides to utilize the 1031 like-kind exchange. They sell the small shopping center and use the proceeds to acquire the mobile home park. The 1031 like-kind exchange can help defer paying capital gains tax on the sale of the shopping center.
This transaction should qualify as a like-kind exchange because it involves similar types of real estate assets. The net market value increases from one property to the next. The 1031 like-kind exchange allows the investor to seamlessly transfer their real estate investment while deferring tax liabilities.
If you are considering a sale with the intent to use the 1031 like-kind exchange, identify the property you want to sell. This must be a qualified investment property and not your primary residence. Again, personal residences don’t qualify for a 1031 like-kind exchange. The subject properties must be held for investment or used in a trade or business.
Before you sell your property, hire a Qualified Intermediary. This step is instrumental because the IRS doesn’t allow the seller “you” to touch the money between the sale and the purchase of the new property.
Once your property is sold, the proceeds minus any closing costs and debt pay-off go to the Qualified Intermediary. Again, the sale proceeds cannot go to you. If you were to receive the proceeds directly, this would be the basis for a disqualification and result in a tax event that you wanted to avoid in the first place.
You have 45 days from the date of sale to identify up to three potential replacement properties. To fully avoid paying any tax, the net market value and equity of the property acquired must be the same as, or greater than, the property sold. This is regardless of their total value or as many properties as you want, as long as their combined value doesn’t exceed 200 percent of the sold property’s value. You must document this in writing and deliver it to your Qualified Intermediary.
From the date of sale of your initial property, you have 180 days to complete the purchase of any property or properties identified in the previous step. The Qualified Intermediary then transfers the funds from the initial sale to the seller of the replacement property.
When you file your taxes for the year the 1031 like-kind exchange took place, include Form 8824 in your tax return, notifying the IRS of the exchange and informing them what property you sold and what property you purchased as part of the exchange.
The IRS rules for 1031 exchanges are very strict, so be sure to follow them closely. If done correctly, a 1031 like-kind exchange can be a powerful tool for deferring tax and building wealth through additional real estate investment.
The tax return and name appearing on the title of the property being sold must be the same as the tax return and title holder that buys the new property. Today, many properties are bought and sold using LLC’s or Trusts so keep this in mind and be consistent.
No additional value received in an exchange can be allowed that isn’t like-kind property, such as cash, property improvements or debt relief.
When you sell a property as part of a 1031 like-kind exchange, all of the equity you receive from the sold property must be reinvested into the replacement property.
When you sell and buy property as part of a 1031 like-kind exchange, both the sale and purchase need to be arm’s length transactions. Family related transfers can certainly come under a lot of scrutiny by the IRS so consult with your advisors.
A Reverse 1031 like-kind exchange is another option that allows you to purchase your replacement property before selling the property you intend to replace. This has many of the same rules and requirements as a normal exchange.
As always, consult with your professional team such as your Lawyer, Accountant, Banker, Qualified Intermediary and Commercial Broker early in the process so that you may take full advantage of this very useful tax planning and real estate investment tool. <
A good example is an investor who owns a small shopping center in Windham valued at $1 million. The investor has held this rental property for many years and has accumulated substantial appreciation. Now, the investor wants to diversify his/her portfolio, and they’re eyeing a mobile home park in North Windham for $1.5 million as they see considerable upside potential.
The investor decides to utilize the 1031 like-kind exchange. They sell the small shopping center and use the proceeds to acquire the mobile home park. The 1031 like-kind exchange can help defer paying capital gains tax on the sale of the shopping center.
This transaction should qualify as a like-kind exchange because it involves similar types of real estate assets. The net market value increases from one property to the next. The 1031 like-kind exchange allows the investor to seamlessly transfer their real estate investment while deferring tax liabilities.
If you are considering a sale with the intent to use the 1031 like-kind exchange, identify the property you want to sell. This must be a qualified investment property and not your primary residence. Again, personal residences don’t qualify for a 1031 like-kind exchange. The subject properties must be held for investment or used in a trade or business.
Before you sell your property, hire a Qualified Intermediary. This step is instrumental because the IRS doesn’t allow the seller “you” to touch the money between the sale and the purchase of the new property.
Once your property is sold, the proceeds minus any closing costs and debt pay-off go to the Qualified Intermediary. Again, the sale proceeds cannot go to you. If you were to receive the proceeds directly, this would be the basis for a disqualification and result in a tax event that you wanted to avoid in the first place.
You have 45 days from the date of sale to identify up to three potential replacement properties. To fully avoid paying any tax, the net market value and equity of the property acquired must be the same as, or greater than, the property sold. This is regardless of their total value or as many properties as you want, as long as their combined value doesn’t exceed 200 percent of the sold property’s value. You must document this in writing and deliver it to your Qualified Intermediary.
From the date of sale of your initial property, you have 180 days to complete the purchase of any property or properties identified in the previous step. The Qualified Intermediary then transfers the funds from the initial sale to the seller of the replacement property.
When you file your taxes for the year the 1031 like-kind exchange took place, include Form 8824 in your tax return, notifying the IRS of the exchange and informing them what property you sold and what property you purchased as part of the exchange.
The IRS rules for 1031 exchanges are very strict, so be sure to follow them closely. If done correctly, a 1031 like-kind exchange can be a powerful tool for deferring tax and building wealth through additional real estate investment.
The tax return and name appearing on the title of the property being sold must be the same as the tax return and title holder that buys the new property. Today, many properties are bought and sold using LLC’s or Trusts so keep this in mind and be consistent.
No additional value received in an exchange can be allowed that isn’t like-kind property, such as cash, property improvements or debt relief.
When you sell a property as part of a 1031 like-kind exchange, all of the equity you receive from the sold property must be reinvested into the replacement property.
When you sell and buy property as part of a 1031 like-kind exchange, both the sale and purchase need to be arm’s length transactions. Family related transfers can certainly come under a lot of scrutiny by the IRS so consult with your advisors.
A Reverse 1031 like-kind exchange is another option that allows you to purchase your replacement property before selling the property you intend to replace. This has many of the same rules and requirements as a normal exchange.
As always, consult with your professional team such as your Lawyer, Accountant, Banker, Qualified Intermediary and Commercial Broker early in the process so that you may take full advantage of this very useful tax planning and real estate investment tool. <
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