Looking to avoid a 1031 Exchange Deadline?
First we have to understand more about a 1031 exchange, otherwise known as a like-kind exchange or Section 1031 Exchange. It is an IRS tax code that allows an investor to postpone paying capital gains tax when selling investment property. The properties must be exchanged for other investment property of equal value in order to qualify, the difference being the basis of the new property will come from the old one’s adjusted basis instead of its sale price. This can also work if you sell your primary residence and buy another one, subject to some rules – but you’re not likely reading this article for advice on how to accomplish that .
What are some 1031 Exchange Problems?
The drawback to 1031 exchanges is they do tie up your money for periods longer than you may be wanting. You cannot buy the replacement property before the sale of the old one is complete, and it can take months to get everything organized depending on how complicated your life gets.
Do you have 1031 Exchange Questions?
For you skilled negotiators out there , I know just what you’re thinking: ” If I sell my property after two years or less, then buy another one within 180 days, I owe no capital gains tax? ” Well … almost . In order to qualify as a delayed 1031 exchange, three things must happen:
1) the property was originally purchased with the intent of being sold for profit at some point
2) you do not own that same property at any time during its holding period
3) you do not occupy that property for any portion of its holding period (i.e. you rent it out)
1031 Exchange Conclusion.
While 1031 exchanges are a great way to avoid California Capital Gains Tax , the process is not as simple as buying and selling stocks or other property, because it ties up your money during the entire process. In order to get out of a 1031 exchange you will have to find another property to “exchange” into the new investment, or transfer to a qualified 1031 Exchange Fund.
There are a couple different ways in which you can go about this step in your 1031 exchange process. First, you can find a property that is already for sale by contacting an agent using standard methods – walking around looking for signs, calling, etc. Another option would be to purchase one of the properties currently being marketed by your current exchange service provider(s) if they have any available properties. Still another option would be to contact them to see what’s on their list at any given time. One thing to keep in mind if you choose this method is that their available inventory may not fit with your needs or could take months before it available. That’s why we prefer using a 1031 Exchange Fund Company.
Take careful note of the costs associated with these 3 methods.
You also have to pay transaction fees when you get out of a 1031 exchange, so be prepared for that cost as well.
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 out of 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.