1031 Tax-Deferred Exchange
In Breckenridge and Summit County, many properties are bought and sold for investment purposes. Often when discussing the sale of investment properties, the phrase "1031 Exchange" is used, but not everyone is familiar with the term.
According to the Internal Revenue Service's web-site (http://www.irs.gov/):
Internal Revenue Code Section 1031 provides an exception and allows you to postpone paying tax on the gain if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange. Gain deferred in a like-kind exchange under IRC Section 1031 is tax-deferred, but it is not tax-free.
What is a 1031 Exchange?
The proper name “1031 Tax Deferred Exchange” is often shortened to “1031 Exchange;” 1031 Exchanges are transactions that join together the sale of an old property and the purchase of a new property for the purpose of deferring taxes.
Exchanges are primarily used for buying and selling investment real estate. Examples of qualifying property include vacant land, rental property, commercial buildings, and homes other than the exchanger’s primary residence.
How Can a 1031 Exchange Work for Me?
A 1031 Exchange can defer the federal and state capital gain taxes that are due when you sell property that has increased in value or been depreciated for tax purposes.
The steps to complete a 1031 exchange are often simple, but complications can arise. Properties may or may not be defined as "like-kind" or as an "investment", depending on complex regulations. These questions are best answered by your tax professional on a case-by-case basis.
Six Things to Understand about a 1031 Exchange:
- Your old and new property must both qualify as investment or business use.
- You will have 45 days from the sale of your old property to identify a list of properties you would consider buying. You can buy one or multiple properties – all of them must be identified within 45 days.
- You will have 180 days from the sale of your old property to close on the purchase of the new property (or properties). Important: if you sell the old property in the last quarter of the calendar year, you may need to file an extension with the IRS in order to receive full benefit of the 180-day period to close on the new property.
- The IRS requires that you use a qualified intermediary to prepare the legal documents for the exchange. The qualified intermediary must be working at arm’s length, and cannot be your friend, employee, brother-in-law, broker, attorney, or accountant. The qualified intermediary will hold the proceeds from the sale until you make the qualified purchase(s) for the exchange. The funds from the initial sale must never be in your possession.
- You must take title the exact same way for the new property (or properties) that you held title in the property you initially sold.
- You must buy a property (or properties) that is, at a minimum, equal to the sale price of property sold. To defer all capital gains, you must reinvest all the proceeds from the initial sale.
Susan Gunnin has assisted many clients in the purchase and/or sale of 1031 tax-deferred exchange properties. For more info, give her a call (970-389-0182) or send her an email.
All information contained herein is deemed reliable, but not guaranteed.
- Featured Properties
Recent Blog Posts
Best Deals - Feb 21, 2012
Click on 'Read Full Post' below to access details. For info on some of the best deals available, check out the list below. I watch the market daily, and a... Read More
2012 Breckenridge Snow Sculpting Contest
Contest began Jan 24th Once again, the space outside the Riverwalk Center in Breckenridge is transformed into an outdoor sculpture gallery, with the sculpt... Read More
Best Deals Breck
For info on some of the best deals available, check out the list below. I watch the market daily, and add listings that I think are real opportunities. Fo... Read More