Are you a property owner who is using a property for investment? If so, you may be eligible for a 1031 exchange. Under the IRS Section 1031 a property owner who holds or uses a property to generate income can defer taxes after the sale of the property as long as they adhere to certain rules. In this article we’ll cover what those rules are and how to abide by them.
Rule 1: The eligibility of a property
Exchanged property must be like-kind real estate but nearly all real estate is like-kind to other real estate. Property cannot be a primary residence or a vacation home. It also matters who owns the property being sold and who will own the replacement; the same taxpayer who sells must also purchase. The price of the replacement property must be equal to or greater than the sales price of the relinquished property to avoid taxable gains. Any amount/debt not re-invested is considered “Boot” and is taxable. The intent of use for the relinquished and replacement properties must support being held for investment or use in business. If the seller of the replacement property is related to you by familial or business association, their eligibility as a seller requires special attention to potentially qualify. Some of the key rules for determining whether a property is eligible are easily defined while others can be tricky. It’s always a great idea to talk about your situation with a professional.
Rule: 2: The timelines
The timeframe for safe-harbor exchanges is a total of 180 days. Day 1 is triggered by the sale of the taxpayer’s relinquished property in which case sale proceeds have been received by Land 1031, the qualified intermediary. The first 45 days are allotted for the taxpayer to formally identify and designate their intended replacement property. This identification must be submitted by midnight of the 45th day while meeting the additional identification requirements. As of day 46, the taxpayer has the remaining 135 days to close on the replacement property. The taxpayer can close any time prior to the 180 day deadline. When the replacement property is scheduled to close, Land 1031, the qualified intermediary, will distribute the proceeds from the relinquished property to the closing coordinator for the purchase of the replacement property.
Rule 3: Get a Qualified Intermediary (QI)
A QI is used to hold the funds from the sale of the relinquished property before transferring it at the close of a replacement property. This allows the IRS to feel confident that all the funds are being used properly. This also allows the exchanger the ability to avoid misunderstandings that result in taxable funds, otherwise known as taxable boot.
Land 1031 can help with all of the rules you see above. Our QI expertise will help the exchanger to identify personal goals and determine eligibility. Our services allow the exchanger to adhere to the strict timelines and rules that Section 1031 dictates. Give us a call today to talk through your situation and determine next steps.
The information presented is for information purposes and is not intended as investment, legal, tax or compliance advice. Land 1031 does not offer or sell investments or provide investment, legal, or tax advice.
About the Author
Olivia Sanders works closely with Agents, CPAs, Attorneys and landowners to help all parties navigate 1031 exchanges and defer capital gains taxes. In her free time, Olivia enjoys spending time with friends and family; she and her son are based out of South Carolina.