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What is a 1031 exchange?
As part of a recent 2 day class I attended to get my SRES Designation (Senior Real Estate Specialist) the class had a great section on 1031’s. I definitely learned some things and I wanted to share it with my readers.
If you would like more information about a 1031 tax exchange for Colorado Springs real estate, Call Kathy at 719-287-1049 or email, KTorline@msn.com
What is a 1031 exchange?
It’s a federal tax allow that allow taxpayers to DEFER capital gains tax on exchanged of property used in trade of business held for investment. They DEFER taxes, not eliminate them.
Why would you want to do a 1031 exchange?
There are many reasons including acquiring a future retirement residence, acquiring property with more appreciation potential, relocation of investments in another location, deferring capital gains.
Are there some basic rules?
- Property must be used in trade of businesses or held for investment.
- Property must be exchanged for like like property (i.e. real estate to real estate NOT real estate to stocks and bonds).
- Replacement property must be identified within 45 days of transferring the exchange property. Only 3 properties can be identified
- Replacement property must be acquired within 180 days or the tax filing deadline
- For a detailed list of the rules and regulations, here’s a link to the IRS web page.
- The value of the replacement property must be equal to or greater than the value of the relinquished property.
What is the role of a QI (Qualified Intermediary)?
The exchanger can not be in receipt of any of the exchange proceeds, or the exchange transaction is not valid and the tax benefits are lost. A QI disposes of the exchange property, holds the sale proceeds, acquires and transfers a replacement property and disburses funds.
Do all exchanges succeed? No
Some estimates say that 40% of exchange transactions fall.
- Not meeting time deadlines
- Lack of replacement properties
- Negotiations breakdown — if the owner of a replacement property knows that the exchanger is under time constraints, she seller may have the advantage and may refuse to compromise on terms and price.
Other Resources:
Federation of Exchange Accommodators
If you enjoyed reading this article, why not Kathy (719-287-1049) KTorline@msn.com
