IMPORTANT FACTS ABOUT LIKE-KIND EXCHANGES OF REAL ESTATE
Many owners of investment and business real estate are not aware of the opportunity to save thousands of dollars in capital gains taxes by exchanging, rather than selling, their investment of business property. A Like Kind Exchange under section 1031 of the Internal Revenue Code provides that the federal capital gains taxes are deferred when business or investment real estate is exchanged rather than sold. Other important facts include the following:
-Most sellers of business or investment property will pay federal capital gains taxes of 20% of the appreciation, plus 25% of any depreciation taken on the property, less the costs of selling the property.
-Most states also impose their own income tax on the sale of business or investment property, but many recognize the deferral of such taxes if the seller effects a Like Kind Exchange under I.R.C. section 1031.
-Payment of the federal capital gain taxes, and most states’ income taxes, is deferred until the property received in an exchange is sold or otherwise conveyed in a taxable transfer.
-A sale of real property followed by reinvestment in real property does not qualify as a Like Kind Exchange. An investor must take certain steps to set up an exchange before the sale of the property closes.
-Property to be exchanged must be investment property such as raw land held for appreciation or second “vacation” homes, or trade or business property, such as rental real estate or farm and ranch property.
-All propertied given and received in a Like Kind Exchange must be like kind property. Fortunately, all interests in real estate are like kind to each other, making it possible to exchange improved property for unimproved property, urban property for rural property, a condominium/townhome for a duplex, a single family rental house for a motel, vacant land for an office building, etc.
-An investor exchanging property has 45 calendar days after the closing to identify up to three properties he or she is interested in acquiring, and 180 calendar days after the closing to acquire the identified property or properties the investor wants to acquire as part of the exchange.
-A qualified independent third party must be used to facilitate the transaction to meet the requirements imposed by the I.R.S. for a valid 1031 exchange. Using a Qualified Intermediary under Section 1031 ensures an exchange will receive favorable tax treatment. The Qualified Intermediary participates on the investor’s behalf by conveying and acquiring exchange propertied and holding the sales proceeds.
To defer all of the capital gains, an investor must acquire property equal or greater in value to the property sold, and must reinvest all equity from such property, Receiving cash, or trading down in value, is treated as boot and taxed as capital gain.
NOT TO BE CONSTRUED AS TAX OR LEGAL ADVICE. IF TAX OR LEGAL ADVICE IS NEEDED, AN ATTORNEY, ACCOUNTANT OR OTHER QUALIFIED COUNSEL SHOULD BE CONSULTED.
Contact us for more information and phone numbers for the “third party” independent contacts.