By following the procedures prescribed by IRC Section 1031, an investor can defer paying capital gains tax when selling investment property and can transfer all of the equity in the investment property (the “relinquished property”) into a new property (the “replacement property”).
To defer capital gains tax, the investor or “taxpayer” must avoid the receipt, or even the possibility of receipt (which is called “constructive receipt”), of the proceeds from the sale of the relinquished property. This is done by using an independent party (called a “qualified intermediary”), such as WealthBuilder 1031 Exchange Company, to facilitate the exchange. The intermediary may not be the taxpayer’s attorney or real estate agent.
The simplest type of Section 1031 tax deferred exchange occurs when the taxpayer sells the relinquished property and acquires the replacement property at the same time. In fact, both closings can occur on the same day.
But what happens when the taxpayer finds a buyer for the property to be relinquished, but has not yet located a replacement property to complete the exchange? By following the following steps, a delayed tax deferred exchange can be accomplished.
- The taxpayer enters into a sales contract with the buyer of the property to be relinquished.
- The taxpayer assigns its position in the contract to the intermediary.
- The buyer pays the purchase money to the intermediary.
- The taxpayer deeds the relinquished property directly to the buyer.
- The taxpayer notifies all parties of the identity of the replacement property within 45 days thereafter.
- The taxpayer enters into a purchase contract with the seller of the replacement property.
- The taxpayer assigns its position in the contract to the intermediary.
- The intermediary pays the purchase money to the seller out of the funds the intermediary received from the buyer of the relinquished property.
- The seller of the replacement property deeds the property directly to the taxpayer within 180 days after taxpayer deeds the relinquished property to the buyer.
In order to ensure your transaction is fully tax-deferred, you should look to exchange “up” in value, meaning that the market value of the replacement property is greater than that of the relinquished property, and any debt associated with the replacement property is greater than that of the relinquished property.
A Texas property exchange expert can guide you through the requirements of properly structuring your transaction. If you or someone you know is about to sell investment property contact the experienced experts at WealthBuilder 1031 Exchange Company, LLC.