Tax Deferred Exchanges
The Internal Revenue Code (IRC) Section 1031 permits deferring capital gains taxes on the sale of investment property. In order to qualify for this 100% tax deferral, the two required elements are:
- reinvest all proceeds from the sale of owned investment property to acquire “like–kind” property;
- acquire “like-kind” property of equal or greater value.
This is, of course, a greatly simplified definition of IRS requirements.
There is still a formal process which must be strictly adhered to in order to capitalize on this 100% tax deferral. Some of the steps which must be taken are:
- Sale of owned property
When you enter into a contract to sell your investment property, there must be a “cooperation clause” which obligates the buyer to cooperate in the Section 1031 tax deferred equity.
- Select a Qualified Intermediary
The Qualified Intermediary sets up the transaction and takes an assignment of the contract of sale and all proceeds.
- Close the Sale
While you will sell directly to your buyer, it represents a transfer from you to the Qualified Intermediary in exchange for a property that you will receive at a later date. You, the seller, must not come into either actual or constructive receipt of the money from your sale.
- Identify a Replacement Property
You now have 45 days from closing the sale of your property to identify a replacement property, or properties. Just as in the sale, a cooperative clause must be included in the purchase contract which obligates the seller to cooperate in a tax deferred exchange.
- Close the Purchase
You have 180 days from the sale of your other investment property to close on the purchase of new “like-kind” replacement property of equal or greater value.
The above process is greatly simplified. There may be special circumstances or other provisions which may affect the exchange. Sometimes vacation homes can even be considered for 100% capital gains tax deferral.
Schwartz & Sinski, P.C. has performed many Section 1031 exchanges. We understand your needs and concerns of having the exchange performed properly to benefit from the full tax exemption.
Please contact us before you decide to sell or buy another investment property. Let Schwartz & Sinski, P.C., Your Partners in Law, handle all the details.
