A 1031 exchange basically enables you to sell a business-use or investment property for another investment or business use property of greater or equal value deferring the capital gains tax, healthcare tax, state taxes, and depreciation recapture tax.
You have to take note that in terms of 1031 exchange, some special rules apply. As with everything else in today’s life, once it sounds too good to be true, it could be. That is the reason why it is important to get assistance from professionals before you make any decision.
Below are some of the things you should know about 1031 exchanges:
- Never Touch the Proceeds from the Sale
It is essential to not have proceeds from sale touch your business or personal account at closing. But rather, see to it that you utilize an accommodator for securing funds in between selling down-leg and buying up-leg. Although the funds placed in your account is for less than sixty minutes, it could likely trigger tax consequence. So, you need to be aware of this in terms of 1031 exchanges.
- Like-Kind Property is Actually Vague
The use of like-kind term is essential to note. Based on IRS, it actually refers to the investment’s nature instead of the form. For instance, you may exchange apartment building for net leased investment or a walnut farm or vice versa. You should ensure that you talk to the consultant regarding how it could trigger depreciation recapture.
- 1031 Exchanges Have a Time Frame
Basically, you only have forty-five days to determine 3 possible properties or two hundred percent of the property’s fair market value sold at the close of the escrow of down-leg. You have 180 days to buy your exchange property after you have sold the prior investment property.
- Investment Properties Only
It is important to note that you can’t use the funds from proceeds to buy personal property. It only means that you can’t sell your own apartment building to buy a new house or use money to fund your own dream holiday vacation. If you sell any investment property, you should buy another investment property.
- Replace Your Debts and Proceeds
When buying any exchange property, you should replace cash proceeds plus debts from the property you are selling on another investment. For instance, suppose you like to sell the property a million dollar, get half a million dollar in cash proceeds, and got a loan of about $450,000. You need to use the cash proceeds and replace your loan. Once you take out some cash or get smaller loans, it’ll be considered boot and this will be a taxable event.
Once executed properly, 1031 exchanges must result to no current taxes and it’ll continue growing tax deferred. It is essential to do your own research and everyone is encouraged to speak to an accommodator on 1031 exchange, CPA or attorney before you do an exchange. For the meantime, you may consider repositioning your investment portfolio.