February 16, 2020
February 16, 2020
IRS Code Section 1031 has provided a method for real estate investors to swap property for another property and avoid the immediate payment of capital gains taxes. To shield yourself from immediate taxation, you must execute what is known as a 1031 exchange between “like-kind properties.” Although the transaction is more complicated than a simple swap, the 1031 exchange enables you to shift your current property investments into other properties.
You might choose to do this if you want to extract value from an existing investment property and invest it in a different property that produces more cash flow. You might fulfill other purposes as well with a 1031 exchange, but the deferment of taxes remains the primary goal. Due to the complexities of these transactions and strict IRS requirements and timelines, you should consult a knowledgeable real estate lawyer in Indiana when seeking the tax advantage of a 1031 exchange. Legal guidance can help you complete the primary task of finding a like-kind property to exchange for your existing property.
What Is a Like-Kind property?
Many forms of real property could meet the IRS definition of like-kind property. Westfield Indiana real estate held as an investment or for productive use in trade or business could qualify. The property can be in either an improved or unimproved state.
A 1031 exchange of like-kind properties does not have to mean that both properties possess the same grade or quality. They need only have a similar nature or character, which primarily means that they are investment properties. Many types of real property investments, could meet the definition of like-kind property, such as:
Unimproved or improved property
Rental homes and apartments
Farms and ranches
Residential senior facilities
Hotels and motels
How to Know If Like-Kind Properties Qualify for a 1031 Exchange
All properties involved in a 1031 exchange must satisfy various IRS requirements beyond simply being like-kind and held for investment. It is important that you seek the advice of a real estate lawyer in Indiana who can inform you about the details of other applicable requirements before you sell or purchase any property.
To defer all capital gains, the 1031 Exchange needs to result in your acquisition of a property of equal or greater value than the one that you sold. You will derive this value figure from the net market value and equity.
If you do exchange your property for a property of lesser value, then the IRS views this as monetary gain. The difference in value is called “boot” and will be taxable. When this happens, you would have performed a partial 1031 exchange.
You must also make sure that the transaction identifies the seller as the same taxpayer as the buyer. This could be you as an individual or possibly an LLC entity representing you.
Timing matters during a 1031 exchange. You will have 45 calendar days after closing the sale on your original property to find a suitable exchange property. Because finding a new property that meets all exchange requirements can be challenging, you can name up to three properties before making a final selection based on due diligence and your financial goals.
Finally, you must take ownership of the new property within 180 days after the sale of the first property or by the due date for your income tax return. You have the option of filing an extension if you need more time to complete the exchange so that you can avoid taxation.
1031 Exchanges Can Take Many Forms
Most property investors cannot simply perform a perfect swap of properties because that would require finding someone with a like-kind property of equivalent value who wants to trade it for your exact property. Typically, 1031 exchanges take the form of a delayed exchange in which a qualified third party holds the money from the first sale while you work out the final transaction. You might have also heard of delayed exchanges referred to as Starker exchanges.
You also have the option to exchange a single property for multiple properties as long as all properties qualify and their values enable tax deferment. For example, you could exchange your farm for five rental homes.
Because so many forms of real property have the potential to qualify for a 1031 exchange, you could transform your holdings of Westfield Indiana real estate into income-producing real estate in markets that might deliver higher returns. Any qualifying properties within the United States could be part of your 1031 exchange.
Legal Support for 1031 Exchanges
You can find a real estate lawyer in Indiana at Webster & Garino. We have managed numerous real estate transactions for investors and will provide you with an in-depth analysis of your proposed transactions to ensure compliance with tax codes. Every 1031 exchange involves unique details, and our service will help you pursue your current and future real estate investment goals. To speak with a Westfield real estate attorney, please contact us at 317-565-1818.
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