A 1031 Exchange California is a transaction that allows a person or business to exchange one property for another, deferring the capital gains tax from the sale of the original asset. The rules governing 1031 Exchanges California are set out by Section 1031 of the Internal Revenue Code. In order to qualify as a 1031 Exchange in California, there must be an exchange of “like-kind” properties – generally used real estate for similar real estate, though it can also apply to personal property or raw land.
The most common type is a deferred purchase, where a buyer takes title to a replacement property before they sell their old one. When they finally dispose of their original property, they will have no capital gains liability because they never actually owned both properties simultaneously. You may want to learn more about potential 1031 Exchange Problems.
For example, Joe sells a plot of land for $100,000. The plot he is selling has been held by the Joe’s family since his grandfather bought it decades prior. He decides to invest in a larger plot further out of town which he will sell for a higher price in the future. Though the plots are different, they are nevertheless considered “like-kind” because they are real estate. This means that if Joe simply buys another plot of land before he sells his old one, then none of the capital gains taxes from either plot would affect him until he eventually sells both properties together.
Otherwise, if Joe sold his first property without purchasing another one first, then any gain over $250,000 would be taxed at 15%. The combined rate of federal and California State capital gains tax is 37.1%. This is because his grandfather’s original purchase was decades ago. The government sees this as a new sale and therefore not a “like-kind” transaction.
In many cases, it can make sense to wait to sell a property with the intention of acquiring another one in order to defer capital gains taxes from both sales. However, this is done at the risk of never being able to actually acquire that replacement property which is where we have your solution. In most cases, there must be some sort of designated time frame or deadline for buying the replacement – otherwise known as a “time-definite”.
If Joe were to fail to buy another plot within his designated time frame, then he would have been considered as having sold his original plot and therefore he would be assessed capital gains taxes on any gains. To avoid this type of scenario from happening you may want to find out more about our great liquid funds that have a modest return on investment from our 1031 Exchange Fund Facilitator. Don’t run the risk of running out of time trying to jump into the next building or property. Take your time, research and make the best investment decision.
There are other steps that need to be taken before you can successfully complete a 1031 exchange, which is why it’s important to contact an accountant or tax professional in order to understand how they work and what all of this entails.
This article provides only general information about how to get started with a 1031 exchange program. It is not exhaustive nor should it be considered advice on any particular matter. The author explicitly disclaims liability for damages incurred by relying on these contents or related materials from third parties. Always seek the help of a qualified legal, accounting, real estate professional and/or such related professionals when dealing with specific legal or financial issues.