Theme: 1031 Exchange Rules
December 29, 2009The Starker Exchange Trust, or the 1031 exchange as it is also called, can be used by an investor who wishes to sell some of their investment property but they do not want to pay taxes on it. The 1031 exchange real estate deal will allow the seller to defer the taxes if they purchase another property that is the same price as the one they want to sell. Of course, there are strict rules regarding this exchange.
If you own an investment property or a business, then you may be able to benefit from this trade and possibly save quite a bit of money, simply by exchanging assets rather than selling them. A “like kind” exchange under the IRS 1031 Exchange applies to personal property and real estate and may save you both state and federal taxes, anywhere from approximately 15 to 36% per dollar gained, depending upon your individual state’s tax rate.
In order to satisfy the Internal Revenue Service’s requirement of a valid 1031 exchange, you must use a QI (Qualified Intermediary) in order to complete your exchange. Of course this does work to your advantage, as using a QI ensures that the exchange will meet all of the 1031 exchange rules and be approved by the Internal Revenue Service. The Qualified Intermediary works on behalf of the taxpayer by doing the buying and selling of assets and holding funds for them.
Once your property has been sold, you will have 45 days to declare the potential replacement business or property that is the 1031 like kind exchange of the property that has been sold. Fortunately, all real estate is considered “like kind” so you can trade an office building for land, etc. Once approved, you must acquire your like kind property within 180 days from the date you sold your old property. In order to defer 100% of the taxes from the sale you have to meet two requirements with the new property; first you have to buy a property that is of equal or greater value than your old property. Then you must use 100% of the net proceeds from the old property to obtain the new property.
In order to be in compliance with the 1031 rules, the last step is to be sure that the person who sells the property is the same one who buys the property. If the real estate that you sold was titled to you individually, then the new property will have to be titled to you as well. In order to be sure the 1031 exchange is approved the same holds true if the original property was titled to a corporation or partnership; the new property has to be titled to the same corporation or partnership.
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