Section 1031 Exchanges For Real Estate Investors

Section 1031 Exchanges For Real Estate Investors



Section 1031 Exchanges for​ Real Estate Investors
When a​ real estate investor sells real estate, a​ capital gains tax is​ recognized, along with a​ tax on deprecation recapture .​
The regular capital gains tax, deprecation recapture, and​ any applicable state tax can often result in​ a​ tax liability in​ the​ 20% to​ 25% range for​ the​ sale of​ real estate .​
(If the​ real estate has been held for​ less than 12 months, all of​ the​ gain will be taxed at​ much higher short term capital gains rates.)
A Section 1031 exchange, named for​ the​ applicable section of​ the​ Internal Revenue Code (also known as​ a​ Starker Exchange, Tax Free Exchange, or​ Like-Kind exchange), allows an​ investor to​ defer all tax on the​ sale of​ real estate if​ the​ real estate is​ replaced with other real estate pursuant to​ a​ detailed set of​ rules.
The replacement property must be identified within 45 days of​ the​ sale of​ the​ relinquished property .​
(1) the​ replacement property must be purchased within 180 days of​ the​ sale of​ the​ relinquished property .​
(2) the​ replacement property must have a​ purchase price at​ least as​ great as​ the​ relinquished property, otherwise some tax will be recognized .​
(3) All of​ the​ cash proceeds from the​ sale of​ the​ relinquished property, less any debt repayment and​ expenses of​ the​ sale, must be reinvested in​ the​ replacement property .​
(4) All of​ the​ cash proceeds from the​ sale of​ the​ relinquished property must be held by a​ Qualified Intermediary, which is​ a​ person or​ institution with whom the​ investor has not recently conducted other business .​
The investor must not have any access to​ the​ cash while it​ is​ being held .​
(5) the​ titleholder of​ the​ relinquished property must be the​ same as​ the​ purchaser of​ the​ replacement property .​
(6) the​ sale or​ purchase of​ a​ partnership interest does not qualify for​ a​ Section 1031 exchange, except under a​ few limited set of​ circumstances .​
(7) the​ relinquished property cannot have been classified as​ inventory, such as​ condominiums built by the​ investor, or​ lots in​ a​ subdivision that was subdivided by the​ investor.
If these rules are followed, real estate investors can sell current real estate holdings and​ replace them with other properties .​
a​ Section 1031 transaction is​ an​ excellent way for​ a​ retiring real estate investor to​ convert actively managed properties into passive properties, such as​ triple net leased properties.




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