How to Avoid Taxes Using a Section 1031 Exchange!
IRS code Section 1031 applies to any real estate held for investment purposes, like rental houses, commercial property, or bare land. It allows the taxpayer to defer, or postpone, the payment of the capital gains tax by rolling the gain from the sale of an old investment property forward into the purchase of a new investment property. And yes, you can use §1031 in selling and buying second homes or vacation homes! This code section can be a very powerful investment tool. We can help you with this, and be sure to consult a 1031 expert if you are considering a tax-deferred exchange transaction.
What exactly is a 1031 Exchange?
When you sell property, you pay tax. But Section 1031 (§1031) of the Internal Revenue Code (IRC) lets you defer the tax. A 1031 Exchange (aka: Starker exchange, tax-free exchange, like-kind exchange, delayed exchange, etc.) is a specific transaction that joins the sale of an Old Property and the purchase of a New Property for the purpose of deferring taxes. §1031 is an actual IRS code, NOT a “loophole.” Where loopholes are technicalities around the law, §1031 IS THE LAW, and is therefore safe and legitimate for anyone who meets the requirements. Qualified properties can be bare land, rentals, commercial buildings, and homes other than your primary residence. You can also use §1031 to buy and sell oil & gas interests, mineral rights, and working or royalty interests. §1031 is a great tool when a property has increased in value or been depreciated for tax purposes. It increases your flexibility, leverage and buying power, and lets you change, diversify, or consolidate your investments.
Things to Know
It applies to nearly any property. If both your old and new properties qualify as investment or business use, you can exchange nearly any type of real estate.
Pick Your Exchange Properties in 45 Days
From the sale closing date, you have 180 days to close on the purchase. There are no exceptions.
Close Within 6 Months
You have 45 days from the closing of your sale to list the properties you may want to buy. There are no exceptions to the deadline.
Use A "Qualified Intermediary (QI)" (we've got'em)
"The IRS says you must use a Qualified Intermediary(QI)." The QI cannot be your friend, employee, broker, accountant, or attorney.
Use The Same Entity To Buy and Sell
You must purchase and take title to your new property exactly as you held title to your old property.
You must buy a property equal or higher in value than the one you sold and reinvest all of the cash proceeds from your sale.