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§1031 Tax Deferred Exchanges
§1031 of the Internal Revenue code of 1986 offers investors one of the last great opportunities to leverage current real estate investments while deferring taxes. By completing an exchange, the investor (or Exchanger) can dispose of their investment property, using all the equity to acquire replacement property, while deferring the capital gains tax that would ordinarily be paid, thereby leveraging all of their equity into the replacement property.
Two requirements must be met to defer the capital gains tax: (1) The Exchanger must acquire "like kind" replacement property and (2) the Exchanger cannot receive cash or other benefits - unless the exchanger pays capital gains taxes on this money, also termed as "Boot". In order for the Exchanger to not receive cash from the sale of a property, a Qualified Intermediary (QI) must be involved. The cash or other proceeds from the relinquished property are held by the QI in a separate, secure account.
Exchanges must be completed within strict time limits. The Exchanger has 45 days from the date the relinquished property closes to "Identify" potential replacement properties. This involves a written notification to the QI listing the addresses or legal descriptions of the potential replacement properties. The purchase of the replacement property must be completed within 180 days after the close of the relinquished property.
To avoid payment of capital gain taxes, the Exchanger should follow three general rules:
(1) Purchase a replacement property that is the same or greater value as the relinquished property
(2) Reinvest all of the equity into the replacement property
(3) Obtain the same or greater debt on the replacement property
The Exchanger must sell property that is held for income or investment purposes and acquire replacement property that will be held for income or investment purposes. Your primary residence is disallowed for a §1031 exchange along with your second home / vacation home which is not generating any rental income.
§1031 does not apply to exchanges of stock in trade, inventory, property held for sale, stocks, bonds, notes, securities, evidences of indebtedness, certificates of trust or beneficial interests, or interests in partnership.
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Securities offered through Pacific West Securities, Inc. Member FINRA/SIPC. Advisory services offered Pacific West Financial Consultants, Inc. A Registered Investment Advisor. AMBAR Financial Group is independent of Pacific West Securities, Inc.
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