Full or partial Tax Deferral
In order to defer 100% of the capital gains tax on the sale of the Relinquished Property, the investor must meet the following requirements:
1) Purchase Replacement Property that is equal to or greater in value than the Relinquished Property sold. Trading down in value results in partial recognition of capital gains tax.
2) Investor must reinvest all net proceeds from the sale of the Relinquished Property. Taking any money from sale transaction is considered “boot” and is subject to capital gains tax.
3) Investor must replace the amount of debt paid off on the sale of the Relinquished Property with new debt, i.e. loan, of an equal amount on the Replacement Property. Investor may NOT take on a larger loan to pocket any net proceeds from the sale. This, too, results investor being subject to capital gains tax.
Important Note
For a 1031 Tax Exchange to be recognized, the investor’s intent to exchange the property (not sell), must be disclosed on all real estate contracts. Before you enter a sale or purchase contract, it is best to speak with one of our associates in order to ensure that the proper verbiage is put in place. Exchange documents must be prepared and signed before the closing date. Failure to do so will result in a non-recognized exchange, and a taxable event will occur.
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SCES is a qualified intermediary that provides 1031 Tax Exchange services nationwide. We are pleased to offer you a free consultation to discuss the process and your goals, so you are informed and prepared when the time is right. And when you are ready to act, we will represent and help you navigate the process from start to finish, while securely holding your proceeds with a FDIC-insured financial institution. We look forward to hearing from you!
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Additional Requirements for Full Tax Deferral
Property qualifications
Like-kind
The IRC Section 1031 requires that the properties involved in an exchange must be held for productive use in trade or business or for investment, and they must be "like-kind". In addition, these properties involved in the 1031 exchange must be located within the United States. As an example, an investor may exchange a rental home into a duplex or multiple condos. Similarly, an investor may also exchange a rental unit for a percentage of ownership into a commercial strip mall.
Properties that are not considered like-kind are dealer property, or property held as inventory. A common example of this would be an investor who flips properties. The “intent” is to make a quick profit, not hold the investment for long term. If the investor were to get audited by the IRS, the IRS will take a careful look at what the investor intended to do with the property at the time of acquisition. If the IRS feels that the intent of the investor was to quickly resell the property, it could be considered dealer property, or inventory, and ineligible for exchange.
timeline
45 days/180 days
In order to meet all requirements, the exchange must be completed within a maximum of 180 days from the close of escrow on the Relinquished Property. Once the sale closes, the exchange clock begins. From this date, the Exchanger has 45 days to properly identify the Replacement Property, in written format, to the Exchange company/qualified intermediary. The exchange may then proceed for another 135 days. If the Exchanger fails to identify replacement property by the 45th days, the exchange monies will be returned on the 46th day and the sale will become non-recognized as an exchange, will be viewed as a straight sale, subject to capital gains tax.
identification
Replacement Property Identification
As mentioned above, the exchanger has 45 days from the close of the relinquished property to identify replacement properties. Please see Identification Guidelines for reference. It is important to note that this identification needs to be in written format, signed and date stamped by exchanger. Acceptable delivery methods are via fax, postmarked mail, hand delivery and an emailed letter that is time and date stamped.