Are you interested in selling your investment property without paying any taxes on the gain? It’s possible if your property qualifies and you use those proceeds to purchase another acceptable property. Of course, there are specific guidelines that must be followed and the taxes are actually deferred but a 1031 Exchange is a fantastic option that you should consider taking advantage of if it works for you.
The guidelines for a 1031 Exchange are ever changing and it is always best to discuss your specific circumstances with a Qualified Intermediary Company but here are some general rules for residential properties.
You must have owned the property for at least 24 months immediately prior to the exchange and the replacement property must be owned for 24 months immediately after the exchange.
During the above mentioned 24 month periods, the owner must rent the property to another person or persons at a fair rental for 14 or more days and the owner’s personal use cannot exceede 14 days or 10 percent of the number of days during the 12 month period the property is rented at fair market value. Use by family members, a trade, or charging below market rents can also be considered owner use.
If your property qualifies, there are additional rules that must be followed for the sale and subsequent purchase.
A Qualified Intermediary must hold the proceeds from the sale. If that money goes into your bank account between transactions it becomes your gain and you must pay capital gains. With that in mind, you must have a company hired before completing the sale of your property. It cannot be a decision made after the fact. If you’re not sure if your property qualifies, talk to a qualified company and find out now.
There are time limits you must meet on your purchase. You have 45 days to identify in writing which possible properties you might purchase and a total of 180 days to complete the purchase. There are qualifications for the properties you identify and the date you file your taxes may affect your time limits so be sure to discuss these with your exchange company.
The purchase price of your replacement property must be equal to or more than the relinquished property’s sale price.
As you can see, there are plenty of guidelines that must be followed to create a safe harbor for a property exchange, but it is a relatively painless way to keep from sending Uncle Sam a good part of your gain. You can also do a delayed exchange, a partial exchange or a reverse exchange so if you aren’t sure if you may qualify, it’s worth a call to find out for sure.
Here are a few exchange companies you may want to talk to in order to find out if your property qualifies or to handle the exchange for you. Keep in mind we are not responsible for the actions of any of these companies and are not affiliated with them in any way. They are just companies that our clients have had good results with in the past. You should do your own due diligence before choosing a company to work with.
Asset Preservation Incorporated www.apiexchange.com 800-262-1031
The 1031 Exchange Experts www.expert1031.com 866-694-0204
1031 Exchange Professionals www.1031cpas.com 888-367-1031
Ten Mile Exchange Services www.1031xchanges.com 970-453-1446