Exchange Real Estate | Tax Saving Strategies for Your Investment Planning

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. . . you can exchange investment real estate in order to take advantage of IRS benefits and, in turn, put your tax savings to work for you! Learn more about the 1031 exchange real estate process and the way you can benefit as an Investor by reading further.

 

HOW TO EXCHANGE REAL ESTATE UNDER THE 1031 PROVISION

Provision 1031 of the U.S. Income Tax Code allows owners of real estate investment property – be it commercial, industrial, residential, or vacant land – to sell or exchange real estate they currently owned property and buy or exchange it for another investment property and defer capital gains taxes. Unless the closing for both properties is simultaneous, exchanging real estate must be done with the help of a licensed, 1031 Intermediary. The real estate exchange must also be for a “like-kind” or a group of like-kind properties which simply means one investment property is “relinquished” to be “replaced” by one or more new investment properties in the exchange real estate process.

INTERMEDIARY NEEDED TO EXCHANGE REAL ESTATE

1031 The intermediary places all the seller’s proceeds from the relinquished property into a special trust fund account designated for the first step of the exchange real estate process. These trust accounts are normally maintained by banks, trust companies or other qualified intermediaries. Then the Seller has a maximum of 180 calendar days from the day of the initial sale to complete the real estate exchange. Within the first 45 days of this period a seller must “designate” candidate properties and properly identify them to the IRS. A Delayed Exchange, where the replacement property is acquired before the relinquished property is sold, is another option to consider.

EXCHANGE REAL ESTATE FOR UP TO 200% OF RELINQUISHED PROPERTY

A seller may target up to three investment properties to replace the relinquished property. The replacement property or a group of properties must not exceed a combined value of 200% of the value of the relinquished property. As long as IRS IRC requirements are met, the funds being held in trust may be used as earnest money toward the purchase of the designated property or properties.

WHAT HAPPENS IF YOU DO NOT EXCHANGE REAL ESTATE PROPERLY?

If no new properties are identified in the first 45 days and no designated transaction is completed during the full 180-day period, the trust will be liquidated and the sale proceeds will be taxed at the prevailing capital gains rate.