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Tax Deferral Information Under Internal Revenue Code §121, homeowners are allowed to exclude up to $250,000 of capital gains if single, $500,000 if married, upon the sale of a principle residence provided they have owned and occupied it two of the previous five years. 1031 Tax Exchange Normally when you sell property, the IRS will tax your gain. The federal capital gains rate is 15% and some states will take an additional tax bite. Section 1031 of the Internal Revenue Code (IRC) however, provides an exception to that general rule. It allows the deferment of your capital gains tax liability, provided that certain rules are met, and that you follow a certain process for exchanging. It is referred to as a "1031 Tax-Deterred Exchange". 1031 Exchange Rules You need to have at least two properties in your exchange: one (or more) that you are selling, and one (or more) that you are replacing it with. Not all properties qualify for an exchange: they must be held for productive use in a trade or business or for investment (e.g. raw land, rental apartment, office building, warehouses, industrial, retail). Importantly, properties held for personal use, such as one's personal residence or vacation home, do not qualify. The properties that you are exchanging do not have to be identical in nature. They just need to qualify as real property. You can exchange a piece of raw land for a rental condo in Myrtle Beach for instance, or sell a 2 bedroom rental condo and replace it with a 3 bedroom rental house, or sell an apartment building and replace it with a warehouse, etc. To defer all of your capital gains tax, (1) the value of the replacement property must be equal to or greater than the sales property, and (2) all of the sales equity (cash remaining) must be reinvested. If you are unable to reinvest all of your sales proceeds, you still may do a 1031 exchange, but just remember that any funds that are not reinvested are liable for tax. The most important requirement for a successful exchange is that YOU CANNOT TOUCH THE MONEY. An independent middleman - often called the Accommodator or Qualified Intermediary (QI) - MUST be used. If you sell a property and touch the sales proceeds, the IRS will tax you. In a 1031 tax exchange, rather than you receiving the sales proceeds, the accommodator receives it. The accommodator (such as Starker Services, Inc), holds that money on your behalf until that time when you direct it to be sent toward payment of your replacement property. Working with the assistance of a REALTOR (Jon Snyder), you identify what to sell and buy, but the accommodator is the legal vehicle through which the properties are transferred. Keep in mind these three critical timing rules. An exchange must be entered into prior to closing on the sales property. Within 45 days from this date of closing, the potential replacement property must be identified, and with 180 days from this sales closing, the replacement property must be closed. Contact Jon Snyder at 303-898-8847 or email jon@PAMELACOLBURN.COM. He can help you identify property to buy or sell in the Denver area. He can also help you find a REALTOR in other areas of the country to assist you. For further details visit www.starker.com. |