It is a great time to think about making a 1031 exchange. The current housing market makes for an amazing opportunity for all wanting to invest in properties. If you own an investment property and are thinking about selling it and/or buying another, then it is important to know about the benefits of a 1031 exchange.
What Is A 1031 Exchange?
A 1031 exchange is a tax-deferred exchange that allows for you to defer capital gains taxes as long as you are purchasing another “like-kind” property. A 1031 exchange allows you to defer capital gains tax, allowing for more capital for investment in the replacement property.
The U.S. Internal Revenue Code’s Section 1031 is where the term 1031 exchange comes from. Section 1031 allows you to avoid paying capital gains taxes when you sell an investment property and reinvest the proceeds from the sale within certain time limits in a property or properties of like kind and equal or greater value.
Florida 1031 exchanges work similarly to the other 1031 exchanges present within the United States. It uniformly acts as a tax deferral strategy for real estate investors. Also known as a like-exchange or a Starker exchange, this is a strategy that will enable you as an investor to trade in one or multiple properties for different ones without incurring any federal capital gains taxes at the time, as long as the exchange is completed within an already set period of time.
Understanding Florida 1031 Exchanges
The original premise of 1031 exchanges was that one property would be swapped directly for another, but this proved difficult to execute since the possibility of finding someone who both owns the property you want and at the same time wants to buy your relinquished property is ultimately slim. As a matter of fact, Section 1031 of the Internal Revenue Code is surprisingly under-utilized and unpopular among investors in comparison to other sections, though it is considered as one of the most beneficial to real estate investors. However, it is important to learn as much as you can about section 1031 if you are a real estate investor who wants to avoid paying thousands or even hundreds of thousands of dollars in capital gains taxes. By using a 1031 exchange you can sell one property and use the proceeds to buy another one, without having to pay capital gains taxes on the sale.
1031 Exchange Rules: "Like-Kind Property"
The properties in the exchange must be like-kind. Like-kind property is defined according to its nature or characteristics, not its quality or grade which means that there’s a broad range of exchangeable real properties. Apartment buildings, single-family rental properties, vacation home rentals, duplexes, commercial office block rentals, and restaurant property rentals are some of the included property types among other things. Multiple properties may be involved within the exchange. All properties involved within the exchange must be located within the U.S., although you’ll be able to trade a Florida investment property for another property elsewhere within the country.
1031 Exchange Rules: Properties Of Greater Or Equal Value
To defer the capital gains tax on the whole amount of the proceeds from the sale of your property, money must be invested into a property or properties of equal or greater value. You can, however, take into account the inspection and broker fees to the entire cost of the upleg properties.
1031 Exchange Rules: Taxpayer Name
Your name must appear the same on both the downleg sale papers and also the upleg purchase papers in order to successfully complete a 1031 exchange. The only exception to this rule is if you are to employ a single-member LLC to sell your property but purchase the new property under your individual name.
1031 Exchange Rules: "The Boot"
It is possible that a 1031 exchange can still be executed even though the replacement property or properties are worth less than the downleg. However, you’ll need to pay capital gains tax on the calculated difference and this is called “The Boot”. Let’s say if a property you sold was worth $1 million and you purchased two properties whose total value was $800,000, you’d pay taxes on the boot of $200,000 and your income bracket will determine your capital gains tax rate (either 0%, 15%, or 20%).
1031 Exchange Rules: Timing
Once the sale of your property closes, you have 45 days to spot potential replacement properties. You have 180 total days from the date of sale of your property to finish the acquisition of the upleg property or properties.
1031 Exchange Rules: Qualified Intermediary
In order to hold the proceeds of the sale of your property in escrow until they can be applied to the acquisition of the upleg properties, a qualified intermediary must be utilized. The actual purpose of this is for the money to never be deposited in your account which suggests you do not immediately get taxed. The money will be managed by QI and make sure their ends of the deal will be kept by all the involved parties.
How Magnolia Law Can Help
Magnolia Law provides one of the best attorneys and experts who know the requirements for 1031 exchanges and can answer all of your legal and real estate investment concerns with utmost efficiency. Talk to us today without obligations and let us help.