When it comes to property investments, the rules for swapping one property for another under Section 1031 of the Internal Revenue Code are surprisingly liberal. For example, you can exchange a strip mall for raw land or an apartment building for a ranch, and as long as both properties are considered to be of like-kind, the gain on each transaction will be deferred and only taxed once the property is sold for cash years down the road.
But as with any complex investment, there are rules that must be followed and guidelines that must be understood. The most important ones, in order to avoid triggering capital gains tax upon the sale of the replacement property:
The 45-day identification period. You have 45 days from the closing of your relinquished property to identify potential replacement properties. You can identify up to three properties regardless of their value, or an unlimited number as long as the total purchase price of the identified properties doesn’t exceed 200% of the sale price of your relinquished property. Click for more https://www.webuyanykindahouse.com/
In addition to timing, there are other key considerations. The exchange must be done by a qualified intermediary (QI). The QI is responsible for managing the exchange and ensuring that the 180-day purchase period begins on the day your relinquished property closes. During this period, you must acquire and close on at least one of the properties you have identified.
You must also ensure that you don’t receive “boot” in the exchange. Boot is any value received in the exchange that isn’t like-kind property, such as cash or debt relief. It’s also crucial to ensure that you completely reinvest the equity from your relinquished property into the new property. If you pull any equity out, you’ll have to pay taxes on it.
A final note on like-kind property: The defining characteristic of 1031 exchanges is that the properties you’re swapping for each other must be of the same or greater value. But unlike the common misconception, this doesn’t mean that they have to be exactly the same in quality or grade. It can include real estate of any type or grade, as well as personal property used in a trade or business. But, as a rule of thumb, it’s generally best to stick with the same form of investment property for the replacement property.
Finally, the two properties you’re swapping for each other need to be located in the United States. Before the Tax Cuts and Jobs Act of 2017, some personal property could qualify, but now only real property can be used in a 1031 exchange. As with any investment, you should consult with a professional to discuss your specific needs and the tax laws.
