1031 tax-deferred exchanges are a great way to save on capital gains taxes when selling real estate, particulary real estate that has seen a substantial increase in appreciation. There are many rules that must be adhered to in order to conduct a successful exchange.
Many people hear the term "like-kind" exchange and believe that if they sell a tract of land that they have to re-invest in land. This is the way it used to be. Now you can exchange any type of real estate for another and it is considered like-kind. For example, you can sell your family farm and re-invest the gain into an apartment building!
Below are the rules that you must follow:
1. Prior to closing on the property that you are selling, you must identify this as the relinguished property. This is easiest if you have language for the exchange inserted in the Purchase/Sale contract prior to ratification.
2. Find a qualified intermediary to handle the transaction for you. One of the most important rules of the exchange is that you and/or one of your agents (accountant, attorney and so forth) cannot touch the funds.
3. After closing, you have 45 days to identify the potential replacement properties. You can identify up to three replacement properties or any number as long as the total fair market value does not exceed 200% of the sales price of the relinguished property. If you change your mind on a property, it can be revoked but must still be in the 45-day window to do so.
4. Once you have identified your replacement property, you have 180 days from the closing of your relinquished property to close on your new property. Be careful, that your federal tax due date does not fall prior to the end of the 180 days, in which case you must have closed prior to your tax due date.
No. You can retain any amount of the receipts but this is considered "boot" and you will have to pay tax on it.
The worst case scenario is that you will be responsible for paying the capital gains tax. This is sometimes better than rushing in and making a bad real estate decision.
No. Your principal residence cannot be used in a 1031 exchange. However, if you own a substantial amount of acreage, the acreage can be used in an exchange with values assigned to the residence and to the acreage.
There is a provision for this which is called a reverse-exchange. It can be done and the rules are fairly similar in which you have 180 days to sell your property.
For more details on 1031 exchanges visit:www.1031.us.