A 1031 exchange gets its name from Section 1031 of the U.S. Internal Revenue Code, which allows you to avoid paying capital gains taxes when you sell an investment property and reinvest the proceeds from the sale within certain time limits in a property or properties of like kind and equal or greater value.
To enforce it, California has a special reporting requirement on taxpayers who do Section 1031 exchanges and acquire out-of-state replacement property. California requires you to file an annual information return (Form 3840) every year until the deferred gain from the Section 1031 exchange is ultimately recognized .
The 1031 exchange can be a great tool to increase your cash flow by deferring taxes. Savvy real estate investors have used it for decades. Through a properly executed 1031 exchange , you can legally delay paying taxes on investment gains when you sell a qualified property.
Section 1031 is a federal tax code, so it is recognized in all states , so you can exchange from state to state .
If you sell rental or investment property, you can avoid capital gains and depreciation recapture taxes by rolling the proceeds of your sale into a similar type of investment within 180 days. This like-kind exchange is called a 1031 exchange after the relevant section of the tax code.
Property Held for Investment Use So your primary residence would generally not be accepted as qualified property in a like-kind exchange . The general rule is that you should not be living in any property that you wish to exchange with a 1031 transaction – though there are some exceptions to that rule.
There are also states that have withholding requirements if the seller of a piece of property in these states is a non-resident of any of the following states : California, Colorado, Hawaii, Georgia, Maryland, New Jersey, Mississippi, New York, North Carolina, Oregon, West Virginia, Maine, South Carolina, Rhode Island,
When completing a 1031 exchange , the profit you make reduces the cost basis of the newly acquired property . That means the deferred capital gains tax on the property you sell will become due when the replacement property is sold . Unless you complete another 1031 exchange upon that sale .
The short answer. The direct cost to you in a 1031 exchange typically comes in the form of a fee paid to your QI. QI fees vary, but most reports indicate that a typical deferred 1031 exchange costs between $600 and $1,200 .
The IRS statute requires that you use a qualified intermediary (QI) to perform your 1031 exchange . While it is possible for an attorney to provide this service, it doesn’t have to be an attorney and it can ‘t be an attorney you have utilized for any other matters.
How to Avoid Boot in a 1031 Exchange Trade up in real estate value with one or more replacement properties. Reinvest all of your 1031 exchange proceeds from the relinquished property into the replacement property. Maintain or increase the amount of debt on the replacement property.
When performing a Section 1031 tax-deferred exchange, an exchanger may sell multiple relinquished properties in a single exchange, exchanging several properties into one (or multiple) replacement properties .
Generally, no, you can not sell real property (“relinquished property”) and defer the payment of your depreciation recapture and capital gain income taxes by structuring a 1031 exchange by building on real property that you already own or by paying off the mortgage on the property.
That’s 180 days starting from the date the property has been relinquished. It’s also important to avoid receiving actual or constructive receipt of funds at closing . Both actual or constructive receipts are treated as a taxable sale by the IRS, which means a 1031 exchange will not be possible.