There are many things to consider when researching the 1031 exchange rules California is requiring. The 1031 exchange process in California and the 1031 exchange requirements in California are two of the most important things to research when looking for a property to use as replacement property.
Section references are made throughout this article to the Internal Revenue Code (IRC), Treasury Regulations, and case law, all of which impact real estate investment. This is not meant to be legal advice or written tax advice. Please be aware that different types of investing have unique rules, so research 1031 exchange rules California is requiring for your specific type of transaction.
Deeper Dive into the 1031 Exchange Rules California
The IRS provides very helpful guidance on their website about what they consider “like-kind” property with respect specifically to trading real estate (“Types Property”). Be sure you are using the latest version of the IRS’ “Types of Property” document when determining if your property qualifies for 1031 exchange rules in California.
Property received in a 1031 exchange must be held for productive use in a trade or business or for investment. This concept is called the Investment/Business Requirement. While this requirement does not mean that you cannot take possession of your replacement property and live in it, you will need to prove that you intended to live in or produce income from your new property within or prior to 2 years after the date of the transaction closing. For example, if you purchased replacement property on October 1st 2015, then you would have until October 1st 2017 before needing proof that it met the requirements to hold the property as an investment.
The 1031 Exchange Requirements California requires, usually involves two properties, the relinquished property (what you are selling) and the replacement property (what you are buying). However, you can use three types of transactions to satisfy your 1031 exchange requirements . The first is called a “Like-Kind” Exchange. This type of transaction requires that both the relinquished property and the replacement property be held for productive use in a trade or business or for investment. The second type of transaction is commonly referred to as an “Exchange Accommodation Titleholder”, or simply an EAT. Ownership must be maintained on both sides of this titleholder situation. A third possible transaction is called a “Delayed Exchange.” This means that ownership is not transferred until 6 months after the transaction closes. The purchase of replacement property must be completed within this 6 month time frame.
When using the 1031 exchange process in California, you will need to qualify each potential purchase to make sure it meets all requirements for a true “Like-Kind” Exchange. There are many factors that relate to one another when considering these rules, so please keep reading about the 1031 exchange California requirements.
Real estate does not have to be used as cash or currency when trading under section 1031 – it can be any type of real estate investment whether operating, raw land, undeveloped land, and even farmland.
Some properties which may not qualify as like kind exchanges are:
– Rental property (it can be considered like kind as long as it’s exchanged for other rental property)
– Personal use property (such as your personal home, second home, or investment real estate that you live in and rent out; these types of properties cannot be exchanged for one another under section 1031)
– Property held for sale to customers or inventory (this is usually a retail scenario and would not fit the bill for a true 1031 exchange).
All property involved in an exchange must have been held by the taxpayer for productive use in trade or business or for investment. This means that any property being relinquished must have been used within two years prior to the exchange for business purposes. If you have not been using your property as part of a trade or business, then it will need to be held as investment property by the taxpayer.
The 1031 Exchange Process California
does not restrict you from using other funds on hand for purchasing replacement property, although this may depend on the type of transaction being used. When exchanging cash, stocks, bonds and mutual funds, there is no problem with doing an all-cash deal as long as either some money is exchanged or those types of properties are involved in acquiring deferred replacement property.
Exchange accommodation titleholders (“EAT”) transactions allow ownership to remain with one party under both titles (this is important because it affects all 1031 exchange rules California requires). In this case, all of the exchange proceeds must be received by a third party, called an “EAT Holder”, who will hold it in escrow for six months from the date of sale. After that time frame has passed, then the EAT holder is required to turn over the money to the new owner.
This rule makes it very easy for investors with limited capital because they are able to sell their property using other people’s money (OPM) during their 1031 exchange process California requires . The OPM comes from qualified intermediary fees or potential financing arrangements made between parties involved within one of these transactions. It is important to note that any loans taken out for replacement property must not exceed $1 million unless you are loaning yourself the money.
A deferred exchange can be used by 1031 Exchange Process California allowed but is not limited to:
– Investors who need more time to sell their current property than a standard or reverse exchange allows
– Investors who own tax lien certificates, bankruptcy properties, and inherited properties (for which the sale may take longer than six months)
With this type of transaction, ownership of property remains with the taxpayer for up to 180 days after the original closing date. There are no limits to how many times you can extend this time frame as long as at least 180 days has transpired between exchanges. For the easiest most liquid and painless 1031 Exchange that happens super fast, talk with a 1031 Exchange Fund Pro.
There are other steps that need to be taken before you fully understand the 1031 exchange rules in California, 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 the rules of the 1031 exchange program in California. 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.