National Capital Title & Escrow, llc, can facilitate 1031 exhanges for like-kind property. We help enable you to use more of your equity to acquire investment properties and to move from a poor investment choice into a better income or equity position.
What property qualifies?
If your property is used in a trade, business, or investment, it qualifies as a like-kind property, meaning that one type of investment property can be exchanged for another type. An example would be the exchange of a condo unit rental for a single-family rental.
What are the property requirements for an exchange?
- The property being purchased must have an equal or greater sales price than the property sold
- All equity from the relinquished property must be used to acquire the replacement property
- There must be equal or greater debt to the buyer on the replacement property
- The investor has 45 days from closing on the relinquished property to identify the replacement property
- The investor has a maximum of 180 days to close on the replacement property
What are the benefits of an exchange?
- An investor may use the capital gains tax dollars saved on the exchange to purchase new property, thereby deferring the taxes, which can continue through exchanges until the tax liability is extinguished by death.
- An investor may exchange property with improvements nearing the end of their useful lives for property with newer improvements
- An investor may purchase a property with reduced management responsibilities
- An investor may exchange one large property for many smaller properties to leave for heirs
- The exchange may improve cash flow
- The exchange may increase appreciation
What is the benefit of using a qualified intermediary?
- The intermediary ensures successful completion of the exchange by coordinating and documenting the process from start to finish
- The intermediary protects against constructive receipt of funds, which is required by the 1031
How is the 1031 exchange reported?
The exchange is reported on the tax return for the year in which the relinquished property was transfered using IRS form 8824 for like-kind exchanges. The form requires a description of the relinquished and replacement properties, purchase date of the relinquished property, date of transfer, date that the replacement property was identified, and date that it was acquired by the taxpayer. Form 8824 also requests related party information because, if the relinquished property was exchanged with a related party, directly or indirectly, who disposes of it within 2 years after the exchange, the taxpayer must report the deferred exchange gain. There are a few exceptions to this related party rule and your tax advisor should be consulted. The form also calculates the gain on the transaction and the basis of the replacement property and requires the fair market value of the exchange properties, liabilities given up and received, sales expenses, cash received and given up, tax basis of relinquished property and unlike property given up, and fair market value of unlike properties received and given up.
How is the gain reported?
Taxable gain is then reported on IRS form 4797 or schedule D, depending on the character of the property given up. Gain must be allocated among ordinary income depreciation recapture, unrecaptured 1250 gain, section 1231 gain, and capital gain. If you are considering seller financing, consult with your tax advisor for the tax effect on your transaction.
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