The only way to avoid the tax on the sale of real estate that has increased in value or been depreciated, is to hire a qualified intermediary to carry out the 1031 exchange process for you.
Section 1031 is the portion of our federal tax code rules that tells us what we need to do in order to push that tax off for you into the future. Capital gain tax will otherwise be due to the IRS and your state on your taxable profit which could be sizable depending on how long you’ve owned the property and how much depreciation your tax preparer has taken on it for you, over the years.
With our 1031 process, we qualify you for an exception to the capital gains tax. When you sell your investment property and then reinvest the money within 6 months, you can defer the payment of all or a portion of that tax. The rules we must follow aren’t difficult and there aren’t that many of them, but they must be followed as written. For example the two timeline rules on identifying the replacement property within 45 days and closing on it within 180 days can not be extended, and you can never have constructive receipt of the funds from the sale of the old property.
Areas Of Service
Intra State Exchange
The 5 Simple Rules Of An Exchange
You cannot take the property sales proceeds into your personal or business bank account at any time. The laws states that all money is to be held by a Qualified Intermediary. This Intermediary can not be your employee, associate, attorney, tax preparer, or broker hold the funds, nor can you just leave them in escrow.
Timeline: You have 45 days from when the first property is sold and closed to identify a list of new properties that you may purchase, and then 180 days to purchase and close on on of those properties identified.
A full tax deferment requires you to re-invest all of the funds and purchase new property or properties of equal or great value. A partial exchange will give you partial tax deferral if this is not the case, but it will not disqualify the exchange.
The sold and purchased properties must be vacant land, rental property or any property used for business or investment purposes. And mix and match of these property types is lawful.
The titleholder of the new property must be the same as the titleholder of the sold property.