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1. Can I exchange for property of less value?
2. Do I have to exchange for the same type of property?
3. Does the exchanges have to been done simultaneously?
4. What is a QI?
5. Will IRS audit a tax free exchange?
6. Can I change the name on the title of the new property?
5 Steps to a Successful 1031 Exchange
It is unbelievable to sell your investment property in 6 months for $400,00 more than you paid for it and not pay any tax on the profit. This is a recurring 1031 problem in hot real estate markets, how do you characterize property that has been held for a short time is very important. The problem is that the taxpayer gets an offer he cannot refuse. Does the property qualify for tax deferred exchange or do you have to pay Capital Gains tax?
Section 1031 states that a tax deferred exchange is UNAVAILABLE if the property is stock in trade and held primarily for resale. Is the property held for trade or was it an investment?
A 1031 transfer can only be defer the capital gain taxes when you sell property that has increased in value and is held for investment. The burden of proof is on the taxpayer.
If you transfer investment property for a like-kind (USE), no gain or loss is recognized. If, as part of the transfer, you also receive other, not like-kind, property or money, gain is recognized to the extent of the other property and money received.
If there is a simultaneous transfer of property is very simple to understand. Because the transfer of the relinquished property for the replacement property occurs at the same time.
Delayed 1031 Tax Free Exchange is more complicated. This is because there is a time gap between the transfer of the property sold Property and the purchasing of the Replacement Property. There are strict time limits for a Delayed Transfer. These are set by the Treasury Regulations.
Both the old and new properties must be for investment. If both properties pass these 5 tests, you can transfer nearly any type of real estate
1 You have 45 days from the closing of your sale to identify the property(s) you may want to buy. You may identify up to 3 property(s). There are no exceptions to this time line!!!
2 You have 180 days from the closing date on your old property to close on the new property. You only have 180 days to close on the purchase of the new property(s) from the 45-day list. There can be no exceptions to this deadline!!!!
3 You must use a Qualified Intermediary. The Internal Revenue Service mandates that you use a Qualified Intermediary to prepare the legal documents, hold the money and the tittle. Your Qualified Intermediary must have been accepted by Internal Revenue Service Qualified Intermediary procedure. They must be disinterested and independent third party. They cannot be your, employee, broker, or even your accountant or attorney.
4 You must purchase the new property and take title to your new property exactly as you held title to your old property. Living Trust are accepted.
5 To defer your tax, you must buy a property equal or higher in value than TOTAL price of the one you sold.
A Qualified Intermediary (QI) is a person that enters into a Qualified Intermediary arrangement with the Internal Revenue Service. They operate under an Agreement. Generally, under the Qualified Intermediary Agreement, the Qualified Intermediary agrees to provide certain documentation and responsibilities during the transfer.
A misconception of exchanging is that, like kind property refers to USE not TYPE. You may exercise your 1031 tax free transfer options to transfer investment proceeds of the sell of an apartment house into ANY type of real estate, for example. an office building, as long as the property is for investment USE.
In closing, the biggest mistake you can make is to think you don't need a Qualified Intermediary, you do. To think that you can have your attorney or accountant hold the sale proceeds until you purchased new property is a major mistake. A Qualified Intermediary is required and essential to completing a valid tax free exchange.
The like-kind transfer is tax-deferred, not tax-free. When the deferred property is sold, the original deferred gain, plus any additional gain realized, could be subject to tax.
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