Consider this scenario: You hear the market is hot, and you decide to swap out a property you own for a new one. Possibly to create more revenue, perhaps because it’s closer to you geographically, or because you want less maintenance to perform. In any of these situations, you have a limited time to act once you sell the property you are exiting, and it is not always easier to close on a new property. Read the following to learn about the specifics of the 1031 Exchange time limits.
Managing real estate investments in California is fraught with difficulties. Having to worry about tax liability while you are dodging legislative hurdles – rent control, local government planning commissions, and short-term eviction bans – counters most wealth-building strategies. While we can help with those issues too, this article is focused on capital gains tax relief. Particularly how not to get burned by taxes when closing out a real estate position with a 1031 Exchange.
Looking to trade in an old investment property for something new? Section 1031 of the Internal Revenue Code allows taxpayers to defer the recognition of gain on business or investment property exchanged for like-kind property. Although this seems simple on its face, below are several common pitfalls.
- Failure to properly use a qualified intermediary (also referred to as an exchange facilitator)
The word “exchange” is applied quite literally in Section 1031. You must exchange the old property directly for the new property, without receipt of any sale proceeds. Because the odds of finding someone who is willing to swap properties is incredibly low, most people must use a qualified intermediary to comply with the “exchange” requirement of Section 1031. The funds from the sale of the relinquished property are paid directly to the qualified intermediary, who uses the funds to acquire the replacement property. The qualified intermediary also handles the exchange of title with the buyer of the relinquished property and the seller of the replacement property. You may need to come up with separate liquid funds or financing if the replacement property is more expensive than the net proceeds from the sale of the relinquished property.