I have several investor clients selling their properties looking to reinvest their money into another investment property. One of the major benefits of this is to help defer the capital gains tax you would have to pay on the sale of that property. Think about it… If you’re in the say 15 or 20% tax bracket, that’s a pretty big hit on your taxes! 1031 Exchange’s are for investment properties. I have a lot of my investor clients that I work with and it’s a great program.
Here’s some information in the last newsletter from Theresa Quartaro with IPX1031 that I thought would be great information for you! Remember, if we can ever be of help, just give us a call. We are here to not only to help you buy or sell, but to be a resource for any real estate need you have!
1031 Refresher – Commonly Asked Questions
It is a good time to review some commonly asked 1031 Exchange questions.
1.) What property type can be purchased to complete a 1031 Exchange?
2.) How much time do I have to purchase new Replacement Property after I sell my old property?
3.) What should be the sales price of the new property in order to defer my capital gains taxes?
4.) What type of new property can be purchased to complete a 1031 Exchange?
The answer to this question is what makes a 1031 Exchange advantageous to real estate investors. To successfully complete a 1031 Exchange the taxpayer must sell real property that is held for investment or productive use in a trade or business (no primary residence or second homes) and must purchase a Replacement Property that is to be held for either investment or productive use in a trade or business.
Individual property type does not matter. Meaning, an investor can sell a single-family rental property and buy an industrial building as their Replacement Property:
Common property types we see in exchanges:
Raw Land (Note, to qualify as investment property, it does not need to be income producing)
Retail Shopping Center
Single- Family Rentals
And many more
5.) How many days does an investor have to identify and purchase their Replacement Property?
The IRS timelines are strict. Once the Relinquished Property is transferred, the investor has 45 calendar days to identify their Replacement Property and an additional 135 calendar days (180 calendar days total) to close on the new Replacement Property. Note that these dates do include weekends and holidays.
These timelines are important to understand for the following reasons:
If your exchange is not set up with a Qualified Intermediary (IPX1031) before the Relinquished Property is transferred, a 1031 Exchange will not be an option.
After the 45-day identification period ends, the properties on the investor’s identification form cannot be modified, and they will only be able to purchase from that list (the identification form can be amended without limit during the 45 days);
The IRS does not provide extensions, unless there are very special circumstances (for example, some presidentially declared natural disasters or military deployment).
6.) What is the dollar amount that needs to be purchased in order to defer all capital gains taxes?
In order to fully defer the investor’s capital gains, the taxpayer will need to purchase a replacement property which is equal or greater than the value of the property they are selling, spend all of their equity and replace the value of any debt that encumbered the relinquished property.
Example: The taxpayer owns a property with an adjusted basis of $600,000 and sells it for $1,050,000. Let’s assume that they have $50,000 in closing costs (commissions, title & escrow etc.), leaving them with a $1,000,000 net. They would need to purchase a Replacement Property for at least $1,000,000 to defer all of their potential capital gains.
Let’s assume they bought a Replacement Property for $900,000. They would still defer $300,000 of capital gains but would be potentially liable to pay taxes on the un-reinvested $100,000 (read about Boot here). This is what is known as a “partial-exchange”.
Remember that the investor will need to work with a Qualified Intermediary to complete a successful 1031 Exchange. The Qualified Intermediary must be engaged prior to the closing of the old Relinquished Property.
If you have any questions about 1031 Exchanges, let me know. This may be a very good way to keep a bit more money in your pocket!