In the real estate investment industry, 1031 exchanges are a common way to defer capital gains tax on property sales. This is because, when done properly, the taxpayer can use the proceeds from the sale of one property to purchase another like-kind property, thus avoiding paying taxes on the gain. However, there are several important rules and terms to know when completing an exchange. AB Capital has an article that outlines some of the key points and terms that investors should understand before beginning an exchange.
Investment Property 1031 Exchange Intermediaries
The role of an intermediary in a section 1031 exchange is to handle the transaction between the investor and the IRS. This person is called a qualified intermediary, also known as an exchange facilitator or accommodator. The QI is responsible for ensuring that the exchange is handled according to federal regulations and is completed within the required timeframes. It is important to select a reputable QI, as the failure of some companies has led to the loss of millions of dollars for investors. Also read https://www.illinoisrealestatebuyersinc.com/we-buy-houses-bensenville-il/
There are three key requirements to meet in order to complete a 1031 exchange. The first is that the properties being exchanged must be of “like-kind.” The property being sold and the property being purchased must have the same kind of use and investment purpose in order for the transaction to be eligible for a tax deferral. The second requirement is that the buyer must purchase a property that is of equal or greater value than the property being sold. The last requirement is that the replacement property must be purchased and closed within 180 days of the date on which the relinquished property is sold.
For many investors, the main benefit of a 1031 exchange is the ability to roll over the capital gains tax that would normally be due on the sale of an investment property. The tax is levied on the difference between the initial purchase price of the property and its sales price, taking into account any improvements or other related expenses and the amount of depreciation that has been claimed. The tax is levied at a long-term capital gains rate, which can be as high as 15% or 20% for higher income taxpayers.
If the replacement property is a new construction, it may be possible to make some improvements during the construction phase and have these counts as part of the 180-day exchange period. Otherwise, only the original property will count as an exchanged property.
If you are planning to sell an investment property and are considering a 1031 exchange, it is important to consult an attorney. They can help you select a qualified intermediary, prepare the necessary documentation and manage the exchange process. They can also work closely with your CPA, Realtor and your lender to ensure that all deadlines are met. In addition, they can assist in preparing the exchange documents and depositing sale funds with the QI for safekeeping until you find and close on your replacement property.
