Do you own investment or rental property that would create a large taxable capital gain if sold? There is a way to your sell your property and defer any capital gains tax under Internal Revenue Code 1031.
In a 1031 exchange, you must buy/trade a property of equal or greater value without removing any cash from the transaction.
However, after the property is sold, there are strict rules and time limits that must be followed in order to defer taxes.
- After the property has been sold, all the sales proceeds must be held by a qualified third-party.
- You have 45 days to report to this intermediary the replacement property that you are going to purchase. Up to three properties can be designated.
- The transaction MUST close within 180 days from the sale date to complete the tax-deferred acquisition.
More than one property can be traded on either side of the exchange. For example, you can trade two rental houses for an apartment building of equal or greater value. Or you can trade an office building for three rental houses of equal or greater value. Raw land can also be used in a trade.
Personal residences don’t qualify for IRC 1031 trades because they are “unlike property” i.e. not used for investment property. However, if you found your dream home you could sell investment property and trade it for the dream house. The dream house would then need to be rented for at least 12 months before converting it into your personal residence.
Sales of a personal residence acquired in an IRC 1031 tax-deferred exchange must be owned at least 60 months before sale. At least 24 of those 60 months must be owner-occupied to qualify for the IRC 121 exemptions.
Tax deferred exchanges are complicated transactions. Be sure to talk to your CPA or real estate attorney before entering into one of these transactions. And of course, it is important to hire a real estate broker who is experienced in working with exchanges.
