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Why is IRC #1031 important to me?
IRC #1031 allows you to defer capital gain tax when you sell real property used for business or investment purposes, and purchase like-kind property. A #1031 exchange will defer depreciation recapture provided the replacement property is also improved real property.
What kind of property can I buy to replace what I am selling?
The IRS considers all real estate to be like-kind with other real estate, as long as both the properties sold and purchased are used for investment or business purposes. So, a primary or vacation home cannot be used in a #1031 exchange, but single-family rental homes, condos, commercial property, farm land, bare land and any other interest in real estate that is held for business or appreciation, and is located in the United States, is like-kind and can be exchanged. You can buy and sell multiple properties within one exchange.
How much do I need to invest in the replacement property?
In order to defer all capital gain, your net purchase price must be greater than your net sales price. As an example, a property sold for $800,000 may have a net sales price of $750,000 after commissions and other qualified closing costs. A purchase of at least $750,000 is required to defer all capital gain tax. If you buy a property of lower value than you sold, then you will be liable for taxes on the difference (this is known as “boot”). In addition, all the equity must be used towards the replacement property(ies). Any proceeds left over after the exchange is completed are also boot.
What are the key steps involved in an exchange?
The IRS requires you to use a Qualified Intermediary (“QI”), also known as accommodator or facilitator, in #1031 transactions. The QI must be assigned into the contract on the property you are selling before escrow closes. Once escrow closes, the QI will hold the proceeds from the sale of the property. The proceeds are restricted for certain periods. You may withdraw proceeds before funds are sent to the QI, but withdrawals will be boot.
From the date escrow closes, there are two timelines. You have 45 calendar days to identify what property you are going to purchase and 180 calendar days to close on that replacement property. When identifying property, you can use either the 3-property rule (you identify up to 3 properties regardless of value) or the 200-percent rule (you identify as many properties as you want up to an aggregate fair market value of 2 times what you sold).
Who is this stranger that is going to hold my money?
You need to be sure that your money is secure, as all intermediaries are not created equal. Here are some important questions to ask any QI before you hand them your money:
• Are you bonded, and what is the size of your bond?
• Do you have errors & omissions insurance coverage?
• What guarantees do I have that my money will be there when I need it?
For more information about #1031 Tax-Deferred Exchanges, call Investment Property Exchanges Services at (877) 747-7875
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