Benefits of Using a Real Estate Attorney When Buying Property Through a 1031 Exchange
The IRS isn’t much for giving gifts at any time of year, but there is one gift they provide taxpayers to avoid paying capital gains taxes on real estate transactions: the 1031 exchange.
Section 1031 of the Internal Revenue Code allows you to defer paying taxes on any gain from the sale of investment property — not your primary residence — if you reinvest your profits in another investment property. This is called a “like-kind” property, meaning that the type of property does not have to be the same, just the purpose — i.e., investment real estate.
Besides being a “like-kind” property, 1031 exchange rules dictate the following:
Replacement property must be of equal or greater value. You can spread out the value over multiple properties if you choose.
Replacement property must be designated. You must designate the replacement property within 45 days of the sale of the old property. It must be done in writing to the third party qualified intermediary holding the proceeds from the sale of the old property.
Multiple replacement properties are OK. The IRS allows you to designate up to three replacement properties so long as you eventually close on at least one of them.
Closing in six months. You must close on the new property within 180 days following the sale of the old property, starting from the date the sale of the old property closes.
You must use a qualified intermediary. The proceeds from the sale of the relinquished property that you are using to purchase the replacement property must never touch your hands. You must designate a qualified intermediary — and it can’t be a family member, your banker, a business associate or others already affiliated with you. Jurado & Farshcian offers qualified intermediary services and we can guide you through the 1031 exchange process.
Cash is taxable. Any leftover cash from the purchase of the new property will be taxed, usually as a capital gain.
Debt considerations. Any mortgage or other debt on the old property, and any debt on the new property, must be considered in the transaction. If your liability decreases, that will be treated as gain and will be taxed.
Names on both titles must be the same. The name(s) listed on the title of the new property must be the same as the name(s) on the property that was sold. There are workarounds for this in certain cases.
The real estate attorneys at Jurado & Farshchian, P.L. are skilled in 1031 exchange transactions, and combine their knowledge and experience in the South Florida real estate market with a commitment to personalized, detail-oriented legal services. Contact one of our experienced Florida attorneys at (305) 921-0440, or email us at email@example.com.