One of the most under-utilized sections in the Internal Revenue Service tax code is Sec. 1031 – perhaps due to its complexity. The truth is that if you want to avoid paying hundreds of thousands of dollars in capital gains taxes from the sale of a property, you should take a good look at this code. The provision allows you to, essentially, swap one investment property for another. However, there are several restrictions and time frames you must adhere to in the 1031 exchange, which makes it a complex process. In this blog, we break down the general steps to initiating and successfully executing a 1031 exchange in Florida.
- Seek out a qualified intermediary. When you are selling an investment property you currently own, you are not allowed access to the money you gain from that sale in a 1031 exchange. Instead, a qualified intermediary must take temporary possession of those funds while you work through the process of buying a new investment property. It is more than worthwhile to find a high-quality intermediary to hold the money in escrow; there are plenty of low-integrity ones out there that can sabotage the exchange.
- Quickly identify a new, like-kind property. The IRS gives you 45 days after the sale of your original property to choose prospective like-kind properties for your next purchase. For a property to be considered like-kind, it must be of the same “nature, character or class,” as defined by the IRS. You may choose up to three properties in this window in which there is no limit on value. Any properties you identify beyond the original three properties may not be valued at more than 200% of the original property’s value.
- Close on the replacement property within 180 days of the sale of the original property. Yes, you have only six months to buy another investment property after you closed on your original property. This time frame scares away some people. Even if a property sale falls through no fault of your own, the 1031 exchange is still considered invalid.
General 1031 Exchange Restrictions
In almost all cases, it is prohibited to exchange properties between family and close friends. One of the most important restrictions of a 1031 exchange is that you may not swap out a personal property for another personal property. The properties involved must be used for an investment or business purpose.
Benefits For You
It is said that death and taxes are the only two certain things in life. Indeed, whenever you sell an asset, you are subject to taxes on the capital gained from the sale. When the assets in question are investment properties, the capital gains tax can reach high amounts – millions, potentially. A 1031 exchange allows you to defer that tax liability an unlimited amount of times. If you own an investment property and are interested in this tax-deferment strategy, call us at (305) 227-4030 to learn how we can help you execute this unique and exciting financial opportunity.
Law Office of Ray Garcia, P.A.
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