In California if a person wants to sell an investment property and wishes to buy another one, he/she should be aware of the 1031 tax-deferred exchange. This procedure allows the owner of investment property to sell the property and purchase like-kind property while deferring capital gains tax
The name of 1031 exchange gets from the U.S. Internal Revenue Code Section 1031 according to which a person can avoid paying capital gains taxes when selling an investment property and reinvest the proceeds from the sale in a property or properties of like kind and equal or higher value.
According to the Internal Revenue Code Section 1.1031, no loss or gain is recognized in case the property held for productive use in a business or trade for investment is exchanged exclusively for the property of a like-kind to be held either for productive use in a business or a trade or for investment.
There are several types of real estate exchange when you wish to participate in a 1031 exchange
One type is a simultaneous exchange when a 1031 exchange happens on the same day.
This type of exchange can take place in two separate ways:
The most common type of 1031 exchange is called a delayed exchange. 1031 Exchange occurs when a person sells a property, receives the money, and buys the property after a delay, which could be from one day to several months before getting the replacement property. A person has 45 days to identify a new property and 180 days to close the transaction
In the event, a property investor fails to buy a replacement property within the time limits, the property investor will have to pay capital gains on the proceeds from the property sale.
This is a type of exchange that allows the person to make improvements to the property before the actual exchange happens. In this case, the property is placed with a capable intermediary for 180 days and within this period a person can use the exchange equity to make the required improvements. However, there are three separate requirements that you must meet
But in case a person wants all gains to be free from taxes he must follow these rules:
This type of exchange allows the person to find and purchase an investment property before selling his own investment property. This helps the person to wait to sell his property until the market value of the property increases.
In this case, the transaction mainly occurs with 100 percent cash. A person has 45 days to determine which one of his investment properties will be relinquished and after that he 135 days to complete the sale.
For more information regarding 1031 exchange or investment proeprties we invite you to contact our real estate attorney at (31) 943-1171 today.
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