Can someone explain how this works? If I have asset X and I want to sell it and then roll the proceeds into asset Y without having to pay capital gains tax on asset X can I do it? What if asset X and Y are totally different kinds of things? What restrictions are there? If anyone has some general knowledge on this... Im all ears! Terry
{sigh} [google] A 1031 exchange, also known as a like kind exchange, is a transaction under United States law which specifies that if an asset (usually some form of real estate such as land or a building) is sold and the proceeds of the sale are then reinvested in a like kind asset, then no gain or loss is recognized, allowing the deferment of capital gains taxes that would otherwise have been due on the first sale. This law is defined by section 1031 of the Internal Revenue Code, 26 U.S.C. § 1031 Example of a 1031 exchange An investor buys a strip mall (a commercial property) for $200,000. After six years he sells the property for $250,000. This results in a gain of $50,000 on which the investor would have to pay a capital gains tax. But if he invests the $250,000 in another property, then he does not have to pay any taxes on the gain now. [/google]
Make sure that you follow the statute. Use an escrow holder, etc. I'd get an accountant involved. If you can save enough, the accountant will pay for him or herself. Art
The "like kind" part is likely to screw me. Somehow im guessing a rental house being sold to purchase a charter yacht may not fly.... Hmmmmmmm both are considered residences from a tax standpoint... both get rented out for income.... hmmmmmmmmmmmmm Capital gains tax rate is 15% right now, right? Not to get started on a rant or anything... but what an absolutely stupid tax. Just think about how much economic activity, jobs, growth and ultimately tax revenue is lost due to this absurd tax. Terry
My dad looked into this about 10 years ago, and IIRC I think he found out it was OK from a tax P.O.V. Not positive, and laws may have changed, but you may be OK....
I looked into this a little over a year ago when I upgraded a weekend home. The catch for me was, you have to sell the old property first. It doesn't work if you buy the new property, then sell the old property.
Not true. What you're describing is a "reverse 1031 exchange". It is entirely legal, in fact I just completed one of these for someone. RMX
My dad has done it 5 or 6 times. In a nut shell, you have to target a property with-in 45 days of settlement on the initial property and settle on the new property within 180 days. When you sell the "new" property you will have to pay capital gains on the difference, unless you 1031 again into something new. If you are definately selling your rental property, I'd suggest that you tell your lawyer to make sure to throw in a 1031 clause in the P and S just in case you decide to use it. If it's in there, you don't HAVE to use it, but if it's not there, you cannot. If you have anymore questions definately shoot me a PM, I'll be more than happy to oblige to any.
And I'm once again confused. Qksilver just described what I was told. Sell the old, identify and buy the new. RMX, you think there's an alternative. I bought a new house in June of '05, didn't sell the 'old' one until March of '06. Now what?
Yeah, to do a reverse 1031, you need a qualified intermediary (QI) to handle the transaction. I sell commercial property and see these more than you would expect. Ta-dumm... http://www.ciremagazine.com/article.php?article_id=141 http://vme.net/ixg1031/whatrev.html http://www.ixg1031.com/1031-reverse-exchange/what.php http://www.realtor.org/libweb.nsf/pages/fg408#topicc RMX
While a 1031 excange can save you 15% in capital gains tax...it is a red flag to the IRS which almost assures you an audit...everyone I know that has done it got audited a year or so later...
1031 exchanges are difficult to do, in reality. I tried several years ago, couldn't complete it. You have to identify 3 properties in a month or so, then close on one of them within 6 months. NOT EASY. The 3 properties you identified can be lost for reasons beyond your control. They can be sold, pulled off the market, etc. The owners maynot want to sell for a reasonable price, etc. And then, try to close within 6 months. On a house - easy. On a commercial property - tougher. And if the seller knows its a 1031, they know they have you over a barrel... And yes, capital gains tax is low. 15% PLUS state PLUS closing fees PLUS sales tax... In Wisconsin, you still lose 25% of your gain as tax... .
I've done almost a half dozen of them this year. They're not that bad, but it can be tricky if you're not paying attention. Typically we'll get the building or property under contract and there's a clear-as-a-bell 1031 addendum in there. Under contract is under contract. If the seller tries any monkey business after the fact, there are all kinds of remedies to fix the problem - at the obvious discomfort of the seller. You need to designate within 45 days of relinquishing the downleg property and 180 days to close on the upleg property. The trick here is to start identifying things when the property you're selling is in due diligence. Typical DD is 60-90 days + 30 days to close in my experience. You start poking around in that 60/90 period and start getting serious during that last 30. By the time you're closed, you have the homework done and you still have 45 days to designate. 45 days goes by like lightning if you haven't done your homework. RMX
