Subscribe Feed (RSS)Have you heard of the 1031 exchange rules? If you haven’t, then you should know that this is important to taxpayers who wants or needs to dispose their property. This rule states that if taxpayers want to dispose of their property, they would need to obtain another property within a certain timeframe so that they would be eligible for capital gain taxes deferment.
Tax payers with personal property and real estate in the United States need to understand and know this rule as this actually helps a tax payer with their capital gain taxes. This gives you an alternative for your investment agenda. But do you understand how this really works for you?
Most information on this rule is very complicated and even too technical. This rule is not just buying another property to defer capital gains taxes of your current property that you want to sell. This is taxes we are talking about so you should expect that there are rules that come with this rule.
So if you want to use the 1031 exchange rules for selling your property, your real estate attorney and CPA will tell you that you would have to have an accommodator or qualified intermediary. Keep in mind that the IRS issued a definitive guideline in 1991 about the roles played by facilitators or qualified intermediaries. It is also stated in that guideline that the intermediary should be unrelated to the seller in order to be eligible for the up mentioned rules.
An accommodator is crucial in order to become eligible, as you need them before you close the sale of your property. They also usually control the funds from the sale and the release it, just so you create an arm’s length transaction and allows you to deed the property to your accommodations who would then sell it.
So how do you identify the property that you would want to exchange for your old one? First, when buying a new property, it has to be a property that is similar in kind to the property that you would want to sell. So if your old property is commercial then you would need to buy a new commercial property to be eligible for free real estate tax.
A seller is also given an option to sell and buy property. A seller would need to obtain his or her second property after he or she has closed the deal for the old property in 45 days. In truth, finding a second property to purchase that is similar in kind to your old property is difficult as this usual depends on market availability.
It is essential that you would also inform the IRS before the end of the 45th day if you have already identified the property. You can inform them in writing, or you can let your accommodator deliver it. The letter should be unambiguous and it is also recommended that information about the property is submitted a couple days early especially if there is a storm or hurricane is coming in to be eligible for the 1031 exchange rules.
