1031 Exchange Tax Information
How to avoid paying taxes using section 1031 and 121
What is a 1031?
When you sell property, you pay tax. However
Section 1031 of the
Internal Revenue Code (IRC) lets you defer the tax. A 1031 Exchange (aka:
Starker exchange, tax-free exchange, like kind exchange, delayed exchange,
etc.) is a specific transaction that joins the sale of an Old Property and
the purchase of a New Property for the purpose of deferring taxes. 1031 is
an actual IRS code, NOT a 'loop-hole.' Where loopholes are technicalities
around the law, 1031 IS THE LAW, and makes it safe and legitimate for anyone
who meets the requirements.
Properties that qualified can be bare land, rentals, commercial buildings,
and homes other than your primary residence. You can also use the 1031 to
buy and sell oil and gas interests, mineral rights, and working or royalty
interests. The 1031 is a great tool when used for property that has
increased in value or been depreciated for tax purposes. It increases your
leverage, flexibility and buying power. The 1031 also lets you
change, diversify, or consolidate your investments.
How to avoid paying taxes
If you would like to avoid paying taxes, you
can. Real estate owners can use two different IRS
code sections to avoid all, or almost all, of the tax on the sale of their
real estate. The Section 121 Code applies to your personal residence. It
provides for an exemption of $500,000 of gain for a married taxpayer on the
sale of a primary residence (or $250,000 of gain for a single person). In
order to
qualify for Section 121, the taxpayer (s) needs to both use and own the
property as a primary residence for at least 2 of the last 5 years.
Code Section 1031 applies to any real estate held for investment
purposes, like rental houses, commercial property, or bare land. This allows
the taxpayer to defer, or postpone, the payment of the capital gains tax by
rolling the gain from the sale of an old investment property forward into
the purchase of a new investment property. You can also use 1031 in
selling and buying second homes or vacation homes! Used together, these two
code sections are very powerful in helping avoiding taxes. Be sure to
consult a 1031 Expert if you are considering a tax-deferred exchange
transaction.
6 Things to Know About Using the 1031:
If both your old and new properties qualify as investment or business use,
you can exchange nearly any type of real estate.
You have 45 days from the closing of
your sale to list the properties you may want to buy. There are no
exceptions to the deadline.
From the sale closing date, you have 180 days to close on the purchase.
There are no exceptions.
The
IRS says you must use a Qualified Intermediary. The QI cannot be your
friend, employee, broker, accountant or attorney.
You must purchase and take title to
your new property exactly as you held title to your old property.
You must buy a property equal or
higher in value than the one you sold, and reinvest all of the cash proceeds
from your sale.
