1031- just the facts Ma’am
Ryan S. Arnold
Section 1031 of the Internal Revenue Service code lets you sell your commercial/ Investment property without having to currently pay the Capital Gains Tax (Federal, State & Local) and the Depreciation Recapture Tax. Instead the payment of those taxes is deferred into the purchase of a second Commercial/ Investment property. If you choose to, you can continue to “roll over” that capital gains tax from one property to another by utilizing Section 1031 of the Tax Code. You may choose to keep on doing this until the time of your death, at which point those taxes are eliminated through a “Step Up In Basis” at the owners death and nobody pays them!
When properly executed with the help of experienced qualified professionals a 1031 Exchange can allow you to defer capital gains taxes indefinitely.
Obviously tax law can be dry and littered with industry jargon that is at times difficult to understand. But the basic concept behind section 1031 is fairly straightforward. There are several basic premises that you should know.
45 Day Identification Period– The qualifying 1031 Replacement Property that you are buying must be identified within 45 calendar days from the date of the closing of the property being sold.
180 Day Purchase Period– The sale of the property being bought must close within 180 calendar days of the close of the one being sold. This is 180 calendar days INCLUDING all weekends & holidays.
Replacement Properties- In order to completely defer all the taxes on a 1031 Exchange, you must replace the all the equity from the property sold along with replacing the same or greater debt from the property sold.
Qualified Intermediary– One of the main features of a 1031 is the use of an independent, qualified third party who handles the money between the sale of the first property and the closing of the second. It is this Qualified Intermediary (QI) who sets up the escrow account for the sale proceeds of the initial property that is being sold. Then, the Qualified Intermediary disburses the funds from the escrow account to purchase the qualifying 1031 Replacement Property. Critical to a successful 1031 Exchange is that the property owner NEVER takes receipt or has access to the funds from his initial property sale.
Finding a trustworthy and credible Qualified Intermediary is critical to a successful Exchange. If you need help in this area, let us know and we can provide you with names of experienced QI’s in your area.