The Section 1031 Exchange Transaction
Invest in Marco Island real estate, beachfront real estate, Naples Fl and golf real estate, Naples Florida, today!
Internal Revenue Code Section 1031 is a specially structured real estate transaction where business or investment property is essentially traded one for the other with no taxes on capital gains. As long as property is "Like-Kind," the IRS recognizes no gain or loss, and therefore no tax is owed. Deferring taxes puts more money in your pocket, effectively increasing your financial flexibility, leverage and buying power. A Section 1031 exchange also allows you to change, diversify or consolidate your investments.
The Right REALTOR®
There are many, sometimes perplexing, IRS rules for this type of real estate transaction, so it is critical to utilize the services of a professional who has a thorough understanding of the intricacies involved.
Lisa Gandy is knowledgeable in Section 1031 Exchange Transactions and understands the complexities in property selection, deadlines and documentation for this specialized type of real estate proceeding. If you're ready to invest in Marco Island real estate, beachfront real estate, Naples Fl or golf real estate, Naples Florida, or if you have questions about the 1031 Exchange, contact Lisa Gandy.
"Like-Kind" Exchange
Properties involved in a Section 1031 transaction must be the same in nature or character, even if they are different in grade or quality. Exchanges are primarily used for buying and selling investment real estate, but they can also be used for personal property that is used in a business. Examples of qualifying property include vacant land, rental property, commercial buildings and homes other than your primary residence. Personal properties generally are like-kind properties. Exchanges of inventory, stocks, bonds, notes, other securities or evidence of indebtedness, or certain other assets are not allowed under Section 1031.
Can Anyone Complete an Exchange?
If you have business or investment properties, and are able to meet the stringent IRS requirements, you are eligible to complete a Section 1031 exchange. Most exchanges involve at least 3 parties: the investor, or "exchanger" who initiates the transaction; the buyer who is purchasing the exchanger’s relinquished property; and the seller who is selling the exchanger a replacement property. Most transactions are not simultaneous, and can be structured to occur in a variety of ways. To benefit from the protections of the tax code, however, it’s important that the exchanger avoid actual receipt of proceeds from the transaction. Usually this is accomplished by hiring a Qualified Intermediary (QI) who works closely with real estate agents, lawyers and accountants to facilitate the transfer of property and money.
How Does a Section 1031 Exchange Work?
The steps for completing an exchange are relatively simple:
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Working with a real estate agent who is knowledgeable in Section 1031 Exchange Transactions, the exchanger identifies a buyer for the property he wants to exchange; or the exchanger identifies a property he wants to purchase.
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Before Close of Escrow, a QI is hired to structure the transaction following IRS regulations.
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With assistance from his REALTOR®, the exchanger signs a contract with a QI in order to sell a relinquished property to a specified buyer, or to an agency facilitating a delayed transaction.
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The QI is assigned the exchanger’s rights in the sale contract.
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At closing, exchange funds are transferred to the QI who instructs the settlement officer to transfer the deed directly from the exchanger to the buyer.
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The exchanger must submit possible replacement properties in writing to the QI 45 days from closing of the relinquished property. (There are limitations to the number and value of properties that may be identified.)
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Within 180 days of closing of the relinquished property, the exchanger must acquire all replacement properties.
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The exchanger signs a contract with a QI to purchase the replacement property.
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The QI is assigned the exchangers right’s in the contract.
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At closing, the QI transfers the exchange funds and instructs the settlement officer to transfer the deed directly from the seller to the exchanger. |
What is a Reverse Exchange?
In a traditional real estate transaction, a property owner usually seeks to sell his existing property before purchase of a new property. In a Reverse Exchange, the desired replacement property is identified and purchased before a buyer is located for the relinquished property. When all IRS rules are followed and deadlines are met, tax is deferred even though the replacement property was acquired before sale of the relinquished property.
How Does a Section 1031 Transaction Benefit You?
A Section 1031 transaction can result in substantial income tax savings! If you meet the deadlines and other requirements, you can defer income tax on the transaction and effectively enjoy an "interest free" loan of the tax that would have been due on the initial sale. When you don’t have to pay capital gains taxes on your sale, you have more funds available for purchase of a new property.
Important Points
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You may exchange nearly any type of real estate as long as both your relinquished and purchased properties are investment or business properties.
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You must provide a written list of the properties you may want to buy within 45 days of closing of your sale. There are no exceptions to the deadline.
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You must purchase one or more properties from your 45-day list within 180 days of the sale closing date. Again, there are no exceptions to this deadline.
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You must hire a Qualified Intermediary (QI) to coordinate the sale with your REALTOR®, lawyer, accountant or other professionals. The QI maintains control of all transaction proceeds.
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Title to your new property must be in exactly the same name or names as title to your relinquished property.
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You must purchase a property greater than or equal to the value of your relinquished property. Any proceeds resulting from your sale must be reinvested. |
A tax-free Section 1031 Exchange Transaction allows you to compound your real estate equity instead of bleeding it through the unnecessary payment of capital gains taxes. Deferring taxes gives you increased flexibility, leverage and buying power while allowing you to change, diversify or consolidate your investments. The range of options is great!
Contact your Marco Island REALTOR®, Lisa Gandy, today to learn more about how a Section 1031 Exchange Transaction can benefit you when you invest in Marco Island real estate, beachfront real estate, Naples Fl and golf real estate, Naples Florida! |
