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Hold on to Your Tax Money!

Posted by on September 3, 2017 at 11:30 AM

Hefty capital gains and Federal income tax liability are things all of us want to avoid. But, when selling appreciated property, you will find yourself subjected to both. Luckily, the IRS provides a way to defer recognition of such taxes through a Section 1031 Like-Kind Exchange. This allows you to relinquish your appreciating property in exchange for a new like-kind property that is of greater or equal value, deferring the recognition of any capital gain or income taxes.

What is “Like-kind?”

“Like-kind” refers to the nature of the investment rather than the form. Meaning, any type of investment property can be exchanged for another type of investment property. For example, a single-family residence can be exchanged for a duplex or even raw land. Further, you can exchange multiple properties for one new property or one property for multiple new properties.

What Property Qualifies?

To qualify for a 1031 Exchange, property must be held for productive use in a trade or business, or for investment. You cannot trade your personal residence, partnership shares, notes, stocks, bonds, certificates of trust of other such items, or property held as “stock in trade”. However, property held as an investment qualifies, such as a rental property.

How does the process work?

In short, a Qualified Intermediary (QI), such as an attorney, must facilitate a 1031 exchange. The QI steps into your place as the principal in the sale of the relinquished property and the subsequent purchase of the new property. At the close of escrow, the QI will retain the sale proceeds and hold them in a segregated trust or escrow account. Within 45-days from the close of escrow, you must identify in writing, one or more possible replacement properties to purchase with the sale proceeds. Within 180-days from the close of escrow of the relinquished property, purchase of the new property must be completed. Once these requirements have been met, you will be able to defer having to recognize any capital gain or income tax.

This information does not constitute legal advice or an attorney client relationship*

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