1031 Tax Exchange – Get the info you need for your Big Bear real estate purchase!
The 1031 tax exchange – and more specifically, deciphering it- is enough to make any well-meaning home buyer or seller go cross-eyed. Here at Big Bear Homes and Land, we deal with the 1031 tax deferred exchange all the time. In fact, we are very familiar with the language in the IRS section 1031 tax deferred exchange. Let us dispel the myths for you and set you straight so you can avoid any confusion when dealing with this tricky aspect of the IRS code.
Taxes are certainly a necessary evil, but you shouldn’t waste time worrying about the 1031 tax deferred exchange. Go ahead and ask us any questions you might have. This can be a very important aspect in your next Big Bear real estate dealing. Don’t be afraid of the 1031 Tax Free Exchange; the idea is to defer capital gains taxes.
Should I be concerned with the 1031 tax code?
The 1031 tax code may be complicated, but we can help you determine how it can work for you. Our team of Big Bear real estate professionals can tell you if you should be taking the steps toward getting a section 1031 tax deferred exchange. It may or may not be the right thing for you to do.
IRS 1031 Tax Exchange – What’s the Point?
Aside from deferring capital gains taxes, a 1031 tax deferred exchange can give you leverage. Call us to find out the advantages that accompany the 1031 exchange law tax. We’ll give you a 1031 tax form, tell you what you need to know and even guide you through the process. Qualified 1031 Tax Exchange Company Links: www.ipx1031.com
What is a 1031 tax deferred exchange? The 1031 tax free exchange can offer significant tax advantages to Big Bear real estate buyers. Often overlooked, a 1031 tax exchange is considered one of the best-kept secrets in the Internal Revenue Code. Under section 1031 of the Internal Revenue Code, a real property owner can sell his property and then reinvest the proceeds in ownership of like-kind property and defer the capital gains taxes. To qualify as a like-kind exchange, property exchanges must be done in accordance with the rules set forth in the tax code and in the treasury regulations.
Why should you consider an IRS 1031 tax exchange?
Upgrade or consolidate property.
A properly structured exchange can provide real estate investors with the opportunity to defer all of their capital gains taxes. By exchanging, the investor essentially receives an interest-free, no-term loan from the government.
Relief from property management. The lessee takes the responsibility to sublet and maintain the property allowing real estate buyers to avoid most of the day-to-day management headaches.
Differences in regional growth or income potential.
Diversify. Own multiple properties rather than just one.
Relocation to a new area.
Change property types among residential, commercial, retail, etc.
Who should consider a section 1031 tax deferred exchange?
You are exactly the person who should consider a 1031 tax deferred if you have real property that will net you a gain upon sale (generally property that has been substantially depreciated for tax purposes and/or has appreciated in fair market value).
There are 5 tax classes of property:
1) Used in taxpayers trade or business. 2) Held primarily for sale to customers. 3) Used as your principal residence. 4) Held for investment. 5) Used as a vacation home.
What are the 1031 exchange rules? 1. The real estate property you sell and the real estate property you buy must both be held for productive use in a trade or business or for investment purposes and must be like-kind. 2. The proceeds from the sale must go through the hands of a qualified intermediary and not through your hands or the hands of one of your agents or else all the proceeds will become taxable. 3. All the cash proceeds from the original sale must be reinvested in the replacement real estate property? Any cash proceeds that you retain will be taxable. 4. The replacement real estate property must be subject to an equal level or greater level of debt than the relinquished property or the buyer will either have to pay taxes on the amount of the decrease or have to put in additional cash funds to offset the lower level of debt in the replacement property.
1031 Tax Form Timeline Identification Period: Within 45 days of selling the relinquished property you must identify suitable replacement properties. This 45-day rule is very strict and is not extended should the 45th day fall on a Saturday, Sunday, or legal holiday. Exchange Period: The replacement property must be received by the taxpayer within the “exchange period,” which ends within the earlier of:
180 days after the date on which the taxpayer transfers the property relinquished, or The due date for the taxpayer tax return for the taxable year in which the transfer of the relinquished property occurs. This 180-day rule is very strict and is not extended if the 180th day should happen to fall on a Saturday, Sunday or legal holiday.
Replacement property identification:3-property rule: You may identify any three Big Bear real estate properties as possible replacements for your relinquished property. More than 95% of exchanges use the 3-property rule. 200% rule: You may identify any number of properties as possible replacements for your relinquished property as long as the aggregate value of those properties does not exceed 200% of the value of your relinquished property. 95% exemption: You may identify any number of properties as possible replacements for your relinquished property as long as you end up purchasing at least 95% of the aggregate value of all properties identified.
Like-Kind Property Examples: Examples of like-kind property include apartments, commercial, condos, duplexes, raw land and rental homes.* Examples of qualified like-kind exchanges:
Apartment building for farm/ranch.
Unimproved property for commercial property.
Airplane for airplane.
Office building for hotel.
Raw land for retail space. Examples of non like-kind properties include primary residences, stocks and bonds, notes, partnership interests, developed lots held primarily for sale and property to be resold immediately after initial purchase or completion of improvements. * Qualification for Section 1031 exchanges depends upon the extent of personal use.
1031 exchange law formats
Simultaneous – Two-party swap - Alderson exchange
Delayed exchange (most common)
The role of the Qualified Intermediary (QI) The QI is a person or entity that can legally hold funds to facilitate a 1031 exchange. To be qualified, the intermediary must not be relative or agent of the exchanging party. As an exception, a Big Bear real estate agent may serve as an intermediary if the current transaction is the only instance in which the agent has represented the exchanging party over the past two years. The use of a QI is essential to completing a successful 1031 exchange. The QI performs several important functions in the 1031 exchange process including creating the exchange of properties, holding the exchange proceeds and preparing the legal documents like 1031 exchange law tax forms. A. The IRS‘s 4 classifications of Real Estate:
Property held for personal use. (Personal Property)
Property held primarily for sale. (Dealer Property)
Property held for productive use in a trade or business. (Business Property)
Property held for investment. (Investment Property)
The last two qualify for Section 1031 tax deferral, the first two do not. Both the property received and the property sold must be of “Like Kind”. It is your use of the Big Bear real estate property that determines its classification. What the other party does with the property does not affect your tax status.
B. Like-Kind Property
Like-kind refers to your use of the property and not to its grade or quality.
“1031″ property may be mixed as to type and still be like-kind. As an example, you may exchange land for a duplex, or a commercial building for a retail store, etc. (See page 14.)
Property held outside the USA and its territories does not qualify for exchange with property held within the USA.
C. Partnership Interests
Your interest in a partnership cannot be traded for an interest in another partnership.
Exception: The partnership as an entity can exchange Big Bear real estate it owns for other like-kind real estate.
D. Transfer Between Spouses
There are no income tax consequences in entering into financial transactions between spouses. In addition, most transfers incident to a divorce are tax free. However, transactions with a former spouse are normally subject to tax unless they qualify for nonrecognition under the provisions of Section 1031.
E. Sale/Lease Back As An Exchange
A lessee´s interest in a lease with a term of 30 years or longer in real property is considered like-kind to other Big Bear real estate property. In addition, property which is subject to a lease can be, even if the lease is for a term of 30 years or longer, the subject of a tax free exchange. However the receipt of prepaid lease payments in an exchange for a 30-year or longer lease is taxed as ordinary income and will not qualify for tax-free exchange treatment.
F. Business Assets
The personal property assets of one business can be exchanged for like-kind assets of another business and will be held as a like-kind exchange under Section 1031. The real property is treated the same as any other exchange. The like-kind requirements for personal property are much more stringent than for real property (e.g., a truck cannot be exchanged for a car, nor can a barge be exchanged for a cargo ship).