Tax Deferral: Things to Learn

The tax deferral is the primary advantage of completing an exchange as opposed to merely selling one property and purchasing another. By availing the property exchange, an owner can avoid paying capital gains tax on the value of a sold property.

Which properties are eligible?

Both properties for 1031 exchange must be located within the United States. Currently, the exchanger is required to use the relinquished property for business, investment, rental, or revenue generation.

Identification and time limits

Once you relinquish a property, you have 45 days to find a property or properties for replacement. This identity needs to be clear, signed, and in writing. Although there are several rules for identifying properties, the three-property-rule is the one that most exchangers follow. Up to three properties of any worth can be found, and you can purchase any or all of them. We must either buy such properties on your behalf or retain your money until the 180-day period has passed after you have committed to buying those properties.

You have 180 days from the day of closing to choose a substitute property that you have found. We will return any money that is remaining in the escrow account if you do not close on a property or utilize all of the funds by the deadline. You will also be responsible for paying taxes on any money that was not spent up to the full gain on the property you sold.

How much is a must-reinvest?

Reinvesting in the replacement property or properties must adhere to all of the guidelines in order for an exchange to be completely tax-free, meaning that all gains will be postponed. The purchase price of the replacement property must be at least as high as the adjusted sale price of the property that was given up. All proceeds in the qualifying escrow account must be reinvested; the exchanger is not permitted to receive cash. Either the Exchanger must provide fresh funds to make up the difference, or the new or assumed mortgage total must be equal to or larger than the debt paid down on the relinquished property. Non-like property, such as cash, owner-held notes, or personal belongings, cannot be given to a taxpayer.