Section 1031 exchanges (aka “like-kind” exchanges), allow a property seller to defer capital gains taxes. IRC Section 1031 reads, “No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment.”
Generally, this means that if you sell a property used for business or hold for investment purposes (not your primary residence), you may qualify for an IRC §1031 Exchange or “property swap” and defer capital gains taxes along with depreciation recapture. If you are selling your property and want to find like-kind exchange or if you already in an exchange Global Major properties can help you find you property or properties that meet your needs.
IRC §1031 Exchanges are not new. In fact, like-kind exchanges have been around since the 1920’s when the section was added to the Internal Revenue Code. Over the past 20 years however, its use has grown in popularity. This is primarily attributable to three factors: Better guidance from the IRS (Rev Proc 2002-22), an increasingly educated base of CPA’s and attorneys, and parabolic appreciation of property values nationwide.
Many real estate owners do not pay capital gains tax when they sell a building, duplex, land, etc. and if it makes financial sense for you to conduct an IRC §1031 Exchange, you should consider your options and consult your accountant or licensed tax consultant.
The actual mechanics of structuring and executing a 1031 “swap” will range in complexity, but typically involve the following steps:
- Include a standard “cooperation clause” in the language in your sale contract
- Contract with a qualified intermediary to escrow your sale proceeds
- Close on your property
- Title company sends all sale proceeds directly to your qualified intermediary (QI) to be held in escrow
- Identify potential replacement properties within 45 days of closing on the property you sold (also known as your “relinquished property”)
- Contract purchase(s) of replacement properties requiring an equal or greater amount of equity and debt as your relinquished property
- Close on your replacement property/properties within 180 days of the closing of your relinquished property
- Transfer proceeds for replacement property closing from your QI for settlement(s)
- Complete all related forms with your federal tax return to report your executed exchange to the IRS when filing taxes for that calendar year
Property sellers should consult competent tax counsel and a qualified intermediary prior to closing on a relinquished property to determine potential tax liability and merits of utilizing a Section 1031 tax-deferred exchange. Generally, it is beneficial to arrange for the sale proceeds to be sent to a Qualified Intermediary upon closing. This provides the relinquished property seller the option to move forward with an exchange if desirable. Even if the property seller ultimately decides against a 1031 exchange, the money would then be returned from the QI and the taxes would be due.
*Please consult your licensed accountant or tax consultant regarding the material facts relating to 1031 exchange and above text and if it applies to your unique situation.