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Imagine finding that
perfect vacation or retirement home, planning a property sale of similar
value to make the purchase, and then coming up far short of funds after
Uncle Sam and capital gains taxes. Fortunately, this does not have to
happen, and those debilitating taxes can be avoided.
Any property owner who
is considering selling or buying a second home should consider the
substantial money saved with the 1031 Exchange. This uncomplicated legal
provision allows an owner to avoid hefty capital gains taxes and increase
buying power by identifying and acquiring a "like kind" property within a
specific period of time.
For example, if an
owner nets $1 million for selling a house, and is subject to 20-30%
capital gains taxes, the value of the sale comes out to only
$700,000-$800,000, a big IRS bite if considering another property purchase
from the proceeds. Following the rules of the 1031 Exchange, however, the
owner won't pay one cent in capital gains, in this case adding a whopping
$200,000-$300,000 to the next property purchase.
There are a few basic
guidelines to the 1031 exchange that must be followed exactly to get the
In order to defer tax
payment, all equity from the property sale must reinvested to acquire
"like-kind" property that is of equal or greater value. Real properties
are all considered like-kind, regardless of whether the properties are
improved or unimproved, as long as both properties are used either for
business purposes or as an investment, and can include an exchange with a
Tenants In Common (co-ownership) interest in a property. However, real
property inside the United States and real property outside the United
State are not like-kind.
A timeline in the
exchange requires that a proposed replacement property or properties must
be identified within 45 days of the sale of the original property, and
that the replacement property must be received within 180 days of the
original sale. All proceeds from the sale must go through a qualified
intermediary, or professional facilitator, rather the seller, seller's
agent, friends, business associates or family.
The extent to which any
of these rules is not followed in an exchange would determine tax
liability, but would not necessarily preempt a tax deferral. For example,
if replacement property value is less, or not all equity from the original
sale is used for replacement purchase, the seller can still qualify for a
partial tax savings under the terms of the 1031 Exchange.
The 1031 Exchange
not only makes sense, it makes money, and gives people more freedom to buy
that dream retirement home or acquire more investment potential without
the painful deterrent of taxation.
Section 1031 of the IRS code allows investors to defer
federal capital gains taxes on the exchange of like-kind investment
properties. If you have a property that qualifies for a Starker Exchange,
contact us today for more information on
completing a Charleston 1031 Exchange. We can help you get set up with a
qualified exchange intermediary to ensure compliance with the sometimes
complicated rules surrounding this transaction.
For more information visit
Internal Revenue Code Section 1031
for potential exchange properties.