Save Capital Gains Tax on Investment
Property
|
| What
is the Benefit? |
| A Like-Kind exchange can help you
dispose of highly appreciated property and defer or eliminate capital
gains. The exchange can help you switch from lower income properties to
those offering a higher return. A Like-Kind exchange can help you
switch from raw/agricultural land to a commercial rental property.
|
| What
is a like Kind Exchange |
| Internal Revenue Code
§1031 provides for the deferred taxation of
exchanges of certain investment properties. There are strict rules that
must be followed in order for the exchange to work. In addition to both
the old and new properties qualifying as "1031" property, the
properties must be exchanged through a "Qualified Intermediary" within
180 days of the sale. |
| What
a Like kind of Exchange is Not |
| This is not a vehicle for selling one
vacation home and buying another. This is not a vehicle for exchanging
one business for another (although the real estate involved with the
business, as well as some other assets may qualify.) This is not a
vehicle for immediately transferring ownership to your children
(although this process can be an important estate planning tool!)
|
| Steps
to a Like-Kind Exchange |
- Selling property must be qualified
1031 property
- The Agreement of sale
should be designed for a Like-Kind Exchange by your tax lawyer.
- The seller has 45 days from
the date of settlement to specify a list of 1031
qualified exchange properties.
- The Seller has 180 days from
settlement to close on like-kind property from the list.
- The money from the first settlement must be
held by a Qualified Intermediary.
- The seller of the first
property must take title to the exchanged property.
- Debt in the property may be subject
to taxation.
|
|
| Tax
Free Wealth Building |
| By deferring taxation, even at the
more favorable capital gains rates, permits a taxpayer to grow wealth
faster. If a property were sold worth $100x, $20x would be capital
gain, and there would be State taxes. The net amount to invest is $80x.
If the entire property were exchanged in a 1031 transaction, there
would be no reduction in investment and the entire $100x would be
available for growth. If the properties are leveraged by a mortgage
loan, then the growth for the exchanged property is far more
advantageous. |
| Conclusion
|
| Before you sign a listing agreement or
Agreement to Sell investment property, have the agreement modified by a
tax attorney for a potential like-kind exchange. |
