Thinking of trading up on an investment resort property? If so, look into 1031 Tax Exchanges (based on IRS Code Section 1031), which allow taxpayers to defer taxes on capital gains resulting from the sale of investment real estate, often a sizable sum since combined Federal and State taxes can run as high as 38 percent.
With an exchange, owners are able to preserve equity, while still selling the property. The underlying concept is that an exchange of like-kind property for like-kind property does not generate funds, which can be taxed since the profits go directly into the new or replacement property. To accomplish this, sellers hire a Qualified 1031 Intermediary (QI) to document the sale as an exchange and to receive the funds from the sale. The QI then delivers the funds directly to the closing agent for the replacement property who deeds the property to the taxpayer.
Central to a 1031 Exchange is the interpretation of like-kind property. While the common assumption is that like-kind implies land for land or a condominium for a condominium swap, the interpretation of like kind is actually less literal. Rather, it defines like kind as meaning that both the replacement and the original property must be used as an investment. So land, condominiums, single-family homes and motels can all be exchanged for one another as long as they are used in the exchanger's business or held as an investment. The amount of debt held on the replacement property must be the same as the amount of debt on the original.
1031 Exchanges are complex mechanisms and like all IRS requirements very specific. For example, exchangers have 45 days from closing to identify properties they intend to purchase and 180 days to complete the purchase. Purchase and Sale agreements must include verbiage indicating the intent to affect a 1031 Exchange.
The 45-day time frame used to be onerous for sellers. Now, they can opt for a Reverse Exchange, in which an additional third party called "the exchange accommodation title holder" (EAT) acquires title to the replacement property until the original property sells. Reverse Exchanges shift the 45- and 180-day time frame to the selling side of the transaction. With an Improvement Exchange, which also uses an EAT to hold the replacement property, sellers can build investment properties from the ground up or improve existing properties. The improvements have to be built and paid for during the 180-day period.
If you are interested in a 1031 Exchange, the first step is to consult your tax advisors as well as an attorney or CPA who is knowledgeable with 1031 Exchanges. Make sure that your real estate professional knows you plan to conduct an exchange and be sure that he or she is familiar not only with the process but also with the specific documentation and time frame mandated by the IRS.
This article is intended to inform readers, but does not constitute any financial or legal advice.
Neda Dabestani-Ryba is a Realtor in Maryland. She is a member of the President's Circle of Top Real Estate Professionals. She can be reached at (800) 536-3806 or visit her website for more information: http://neda.dabestani.pcragent.com/
Prudential Carruthers REALTORS is an independently owned and operated member of Prudential Real Estate Affiliates, Inc., a Prudential Financial company. Equal Housing Opportunity.
GETTING THE MOST FOR THE LEASE-TRACKING YOUR REAL ESTATEIf you... Read More
When I first started getting active in creative real estate,... Read More
With so many estate agencies vying for your business, choosing... Read More
So you've decided to take advantage of the booming real... Read More
The Echo Boomers or Generation Y currently make up about... Read More
Do you feel there is going to be a real... Read More
The old adage that "timing is everything" especially applies to... Read More
Use Google right now and do a search on, "Home... Read More
Real estate investing usually begins with the purchase of a... Read More
I'm often asked about the basics of Design Psychology, which... Read More
Building a house (or lots of them) seems to be... Read More
Home buyers and sellers should think twice before jumping into... Read More
What's the difference between death and taxes?Death doesn't change every... Read More
If you've just bought a house, you may be able... Read More
Title to a property is a record detailing the owners... Read More
Searching for just the right home can be very exciting.... Read More
Analyzing and finding the right property deals:Firstly read my other... Read More
The Southern California city of San Diego has all the... Read More
Good Homes Under $50,000? My wife Ana and... Read More
FSBO, what is it? FSBO means For Sale by Owner,... Read More
Of course you should. I practice this for quite a... Read More
Zero down? Why would a seller want to walk away... Read More
Today's residential real estate market for investors has become very... Read More
Many of you may not be aware of the various... Read More
In this article, you're going to discover new techniques for... Read More
A Realtor has just talked to you and said, "I... Read More
We have been studying a trend of new home buyers... Read More
Is there a perpetual shadow hovering over your house? Do... Read More
There are many expenses that come with buying a home.... Read More
Do you realize that you might be prevented from renting... Read More
The secret disclosed on how you too could achieve financial... Read More
I know many investors step into the game of real... Read More
I have done so many appraisals where I saw obvious... Read More
Home Buying Don'tsYour home buying process is well underway. The... Read More
Over the last two years there has been so much... Read More
One of the great challenges to selling a home can... Read More
Financial ConcernsOf the three types of income property, industrial property... Read More
Unless you have been living in Siberia, you know that... Read More
Property Investing Secrets:What No One Ever Tells You-How Real Estate... Read More
Buying Your First HomeBuying Your Own Home isn't nearly as... Read More
Property Investing: A Buyer's Secret Weapon When Purchasing Real EstateMy... Read More
If you're dreaming of making money in real estate, it's... Read More
What is title insurance and why should any buyer get... Read More
The real estate agent is a valuable source of potential... Read More
If You want to be Financially Successful you need to... Read More
Curb appeal is the most important challenge you'll face when... Read More
There are several different types of listing contracts. Few of... Read More
At this moment, you have access to some amount of... Read More
Choosing the wrong Home Inspector can cost you a lot... Read More
This story is true and not meant to hurt anyone,... Read More
Turn the Television on any Sunday morning and you'll find... Read More
I can't emphasize enough how important it is to have... Read More
According to the National Association of Realtors, For Sale By... Read More
Tenants in Common is a way of sharing ownership of... Read More
Turn on the TV at almost any time day or... Read More
Avoid 12 Common Mistakes Made by Novice Investors and Ensure... Read More
In addition to zoning, some properties have covenants recorded at... Read More
Financial literacy is the means of empowering consumers to make... Read More
How's the real estate marketing doing? Is the huge jump... Read More
European tax haven Andorra enjoys the same fiscal benefits as... Read More
The discount on a foreclosed property is not as great... Read More
An effective real estate advertising strategy entails a 'shotgun' approach.... Read More
From the book No Smooshing!For years, I've carried on a... Read More
Equity is the value of your home minus what you... Read More
The real estate bubble is a hot topic today; annual... Read More
We understand the being in foreclosure is a scary thing.... Read More
Real Estate |