Often clients will come to us wanting to sell a property, but feel trapped by the high capital gains taxes that they would incur by selling.
We have the pleasure of informing these clients that there is a special rule in the Internal Revenue Code that will allow them to defer capital gains by making a “1031 Exchange.” This allows the client to sell without having to deal with the tax implications immediately. (Under the right facts, the client may never have to deal with Capital Gains Taxes.)
Put simply, a 1031 Exchange allows you to “swap” one property for another. There are strict IRS requirements to get this benefit:
1. The money from the first Closing must be held in escrow by a Facilitator. If any of this money comes to you, it may disqualify the entire Exchange.
2. You must then identify a replacement property within 90 days of closing.
3. You must close on the replacement property within 6 months of the first closing.
When it comes time for the second Closing, the Facilitator sends the money held in escrow to the Seller of the replacement property.
These time limits are extremely important. If you miss any deadlines, the transaction will be disqualified as a 1031 Exchange even if you do everything else right.
In addition, the second property must be of equal or greater value than the first property. This way, you are not earning any money on the sale of the first property—so you will not owe any capital gains taxes.
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If you would like to participate in a 1031 Exchange, we can help. We have experience with both residential and commercial Exchanges, and work closely with a Facilitator who has years of experience as an escrow agent. Do not let capital gains taxes dissuade you from selling your property.