IRS Code 1031 Property Exchanges
McLaughlin Investments Advisors are investment property specialists who have many solutions for 1031 exchange clients. Please contact us for more details.
Internal Revenue Code 1031 Tax Deferred Exchange
IRS Code 1031 allows an investor in real property to defer capital gain upon the sale of that property by trading for new properties of a like kind. In other words, you can trade an existing property for a new property or properties without having to pay taxes on your gain. The tax liability is deferred into the new property(ies).
In plain English, if you own investment real estate property which has served its purpose, and you want to buy a different investment property, a 1031 Exchange may be of great interest to you.
Example: You own a retail property which you purchased in 1990 for $1,000,000. You have found a better property that can give you more rental income or a better return. However, due to equity appreciation, your old property has gone up in value and is now valued at $1,500,000. Under normal circumstances you would need to pay taxes on your capital gain of $500,000 when you sell the old investment property.
Not so if you do a 1031 Tax Deferred Exchange! You do not pay capital gain at the time of sale - it is deferred. One advantage is that you can purchase a more expensive property.
Another advantage of a 1031 Exchange allows you to defer capital gain until the end of your life, or as long as you do not sell your investment property. And you can do multiple 1031 Exchanges over the years and keep deferring your capital gain.
There are plenty of elements that you need to know and do in order to effect a 1031 Exchange correctly. A 1031 Property Exchange should be handled by professionals. Mclaughlin Investments will assist you by finding the right new investment property.
What is a like kind of property? At this time, like kind property held for an investment or for a productive use in trade or business. The Taxpayer is also permitted to exchange an income producing property for vacant land and vice versa. In fact, the exchange can result from any combination of real property for real property.
How long do I have to identify my replacement property? The Taxpayer has 45 days from the close of the relinquished property to identify the replacement property, and 180 days, also from the close of the relinquished property, to close on the identified replacement property.
How many replacement properties can I identify? The Taxpayer may identify three properties of any value or four or more replacement properties whose total value does not exceed 200% of the total value of the relinquished property.
Do I have to acquire a property of equal or greater value? To accomplish a total tax deferral, the property(ies) you acquire in the exchange should be equal or greater in value, debt, and equity. If your replacement property is lesser in any of these areas, you will have a tax liability on the difference.
When do I have to set up my exchange? You should talk to a qualified real estate broker first. However, once the relinquished property has gone to contract, an Intermediary should be contacted to set up the exchange account. Under no circumstance can the relinquished property close before the exchange agreement has been signed.