There is no denial to the fact that taxpayers are always on a lookout to find the new ways to defer taxes. When it comes to deferring taxes on capital gains, you know what is the best. It is selling your Relinquished Property and investing in a Like-Kind Replacement Property by investing in 1031 exchange properties.
You may be having knowledge about many of the IRS code sections but IRS code section 1031 basics are still unclear in your mind. Right?
This blog will throw light on IRS Code Section 1031. So that you are able to meet the requirements. Otherwise, you will have to pay a tax on your capital gain of up to 37.5%. Let’s begin.
- 1031 exchange properties can’t be primary When you want to do a 1031 exchange, according to the IRS Code Section 1031, you cannot use a your Primary Property or Residential Property for doing 1031 exchange to defer taxes. However, there are some smart ways to do so. You just have to trick the authorities into believing that your property isn’t your residence.
- The Investment Property or Replacement Property can’t be put to personal use The net tax legislation came on 22nd of December in 2017 and ever since then some personal properties can be used as 1031 exchange properties. They are aircraft and equipment and franchise licenses. This new law qualified real estate exchanges. Apart from this, corporate stock and interests on partnership didn’t qualify even then.
- The term Like-Kind is very broad Like-Kind Properties, this term is very very broad in the real scenario. As the word suggests, a taxpayer doing 1031 exchange can exchange his Investment Property with a property that is like his Relinquished Property but isn’t necessarily exactly like it. For instance, you can exchange an apartment with a strip mall or even a ranch or raw land. Infact, a business can also be exchanged with another one. So, you are never short of options. Still, DST is considered a better alternative due to many reasons.
The cash received as the capital gain will anyway be taxed
If you have acquired the Replacement Property at a price lower than the amount you received by selling the Investment Property, there will be some cash left with the intermediary. This amount will be known as boot. The intermediary will transfer give it back to you at the end of 180 days and that amount will still be taxed according to the IRS Code Section 1031 as it will be considered as the Capital Gain.You should close the transaction in six months
In case you have opted for a Delayed Exchange, you will need a Qualified Intermediary. You will keep the cash in his escrow account. Be ready with the Like-Kind Options (they can be three or more) and designate them in the name of intermediary before 45 days. Moreover, you should be done with your 1031 exchange properties transaction within a span of 180 days. This means that you should sell your Relinquished Property, designate the Replacement Properties within 45 days of the sale to the intermediary and then close the Replacement Property within 135 days. The 45 days and 135 days are running concurrently summing it all as 180 days.The 1031 Exchange comes with a lot of rules that a taxpayer has to abide by. This blog is just a glimpse of that. Should you been looking to do 1031 Exchange, feel free to reach us at 1031Sponsors.com.
I never knew that taxpayers are always on the hunt for ways to defer taxes especially with the way that money is becoming tighter to get. While investment properties bought with the intent of personal use cannot be used by the person purchasing it, another thing to keep in mind is that the entire transaction has to be closed within six months in order to avoid more trouble. While I have absolutely no experience when it comes to the 1031 property, it’s important to know how it functions if in case you would turn to it in the near future.
The intermediary holds all the profits from the sale and then disburses those monies at the closing of the exchanged property (or sometimes for fees associated with acquiring the new property). In order to be qualified, the entire amount of the cash proceeds from the original sale has to be reinvested toward acquiring the new real estate property. Any cash retained by you from the sale of the old property is taxable income.