Read This Before You Carry Out a 1031 Exchange
It is a requirement that you pay capital gains tax when you sell a non-inventory asset at a profit. It is, however, possible to defer capital gains tax payments as long as you make sure to meet certain requirements. For instance, you will need to pay tax on the disposal of property if there was a profit somewhere. For the exemption to work, you will need to use up the proceeds from the sale to purchase another property within a certain period. This swap effectively acts as your shield against the taxation. Discussed next are some of the other conditions that you must satisfy to defer the payment of capital gains tax.
It is a must that you hold the new property so as to qualify for the exemption from capital gains tax. If you later sell the property, you will be liable to pay capital gains tax. One desirable aspect is that you can defer the payment of capital gains tax indefinitely by swapping properties now and then.
It only applies to business and investment property, meaning that the swap of residential property is not included. You cannot, therefore, swap residential property in the hope of deferring the payment of capital gains tax. The exchange of vacation homes is different in this respect, but there is a very narrow loophole, making it not worth the trouble for many people.
A delayed exchange is allowable since you may find it tough to get someone who is looking for your type of property and is swapping the exact property you are looking for. For the delay to be effective, a middleman is needed to hold your funds, after which he purchases the property you wish to buy in your place. This involvement of a third party is still considered a swap for taxation purposes.
A valid swap is one that involves the identification of the “replacement property”. It involves making the identification in writing, signing the document, and handing it over to a qualified intermediary before a 45-day period lapses.
The exchange is valid if it satisfies the like-kind requirement. The definition of like-kind in this instance is broad, meaning that you can sell an apartment and acquire raw land since they all fall under the classification of property.
It is advisable to seek help from qualified experts if you want your exchange to succeed. Due to the complexities of tax laws, you are likely to err when handling these transactions. The fact that tax rules keep changing makes it essential to seek help. An estate agent, attorney, accountant, and tax specialist can help you navigate the complexities involved.