There are many property owners who either invested in Real Estate as a source of wealth building and there are others who, instead of selling their homes, choose to rent their property. Regardless of which catagory you fall into, the FIRST and most important step to using a 1031 Exchange to defer Capital Gains is to consult a Professional 1031 Exchange Intermediary. If you contact me, I will happily guide you to a depandable & trustworth Professional.
STEP 1: LIKE-KIND PROPERTY The first requirement for a 1031 exchange (rollover) is that the old property to be sold and the new property to be bought are like kind. This is frequently one of the most misunderstood concepts involving 1031 exchanges. Like-kind relates to the use of properties. As a result, the old property as well as the new property, must be held for investment or utilized in a trade or business. Vacant land will always qualify for 1031 treatment whether it is leased or not. Furthermore commercial property may be used to purchase a rental home or a lot may be sold to buy a condo. “Flip properties” do not qualify.
STEP 2: 45 DAY IDENTIFICATION PERIOD The Internal Revenue Code requires that the new property be identified within 45 days of the closing of the sale of the old property.
The 45 days commence the day after closing and are calendar days. If the 45th day falls on a holiday, that day remains the deadline for the identification of the new properties. No extensions are allowed under any circumstances. If you have not entered into a contract by midnight of the 45th a list of properties must be furnished and must be specific. It must show the property address, the legal description or other means of specific identification.
STEP 3: 180 DAY PURCHASE PERIOD This rule is simple and straight forward. Section 1031 requires that the purchase and closing of one or more of the new properties occur by the 180th day of the closing of the old property. The property being purchased must be one or more of the properties listed on the 45 day identification list. A new property may not be introduced after 45 days. These time frames run concurrently, therefore when the 45 days are up the taxpayer only has 135 days remaining to close. Again there are no extensions due to title defects or otherwise. Closed means title is required to pass before the 180th day.
STEP 4: USE A QUALIFIED INTERMEDIARY Sellers cannot touch the money in between the sale of their old property and the purchase of their new property. By law the taxpayer must use an independent third party commonly known as an exchange partner and/or intermediary to handle the change. The party who serves in this role cannot be someone with whom the taxpayer has had a family relationship or alternatively a business relationship during the preceding two years. The function of the exchange partner/intermediary is to prepare the documents required by the IRS at the time of the sale of the old property and at the time of the purchase of the new property. The intermediary must hold the proceeds of the sale in a separate account until the purchase of the new property is completed. The taxpayer is entitled to the interest of these funds and must treat the interest as ordinary income during the period of escrow.
STEP 5: TITLE MUST BE A MIRROR IMAGE Section 1031 requires that the taxpayer listed on the old property be the same taxpayer listed on the new property. If you and your wife are married and sell the old property than you and your wife must also be on the title to the new property. If a trust or corporation is in title to the old property that same trust or corporation must be on title to the new property.
STEP 6: REINVEST EQUAL OR GREATER AMOUNT In order to defer 100% of the tax on the gain of the sale of old property, the new property must be of equal or greater value. There are actually two requirements within this rule. First, the new property has to be of greater or equal value of the one which is sold. Secondly, all of the cash profits must be reinvested. In reality you may deduct closing expenses and commissions from the sale of the property being sold.
reference: Ronald S. Webster – Counselor at Law