Imagine finding that perfect vacation or retirement home, planning a property sale of similar value to make the purchase, and then coming up far short of funds after Uncle Sam and capital gains taxes. Fortunately, this does not have to happen, and those debilitating taxes can be avoided. 

  Any property owner who is considering selling or buying a second home should consider the substantial money saved with the 1031 Exchange. This uncomplicated legal provision allows an owner to avoid hefty capital gains taxes and increase buying power by identifying and acquiring a "like kind" property within a specific period of time.

   For example, if an owner nets $1 million for selling a house, and is subject to 20-30% capital gains taxes, the value of the sale comes out to only $700,000-$800,000, a big IRS bite if considering another property purchase from the proceeds. Following the rules of the 1031 Exchange, however, the owner won't pay one cent in capital gains, in this case adding a whopping $200,000-$300,000 to the next property purchase.

  There are a few basic guidelines to the 1031 exchange that must be followed exactly to get the tax credit.

  In order to defer tax payment, all equity from the property sale must reinvested to acquire "like-kind" property that is of equal or greater value. Real properties are all considered like-kind, regardless of whether the properties are improved or unimproved, as long as both properties are used either for business purposes or as an investment, and can include an exchange with a Tenants In Common(co-ownership) interest in a property. However, real property inside the United States and real property outside the United State are not like-kind.

  A timeline in the exchange requires that a proposed replacement property or properties must be identified within 45 days of the sale of the original property, and that the replacement property must be received within 180 days of the original sale. All proceeds from the sale must go through a qualified intermediary, or professional facilitator, rather the seller, seller's agent, friends, business associates or family.

  The extent to which any of these rules is not followed in an exchange would determine tax liability, but would not necessarily preempt a tax deferral. For example, if replacement property value is less, or not all equity from the original sale is used for replacement purchase, the seller can still qualify for a partial tax savings under the terms of the 1031 Exchange. 

   The 1031 Exchange not only makes sense, it makes money, and gives people more freedom to buy that dream retirement home or acquire more investment potential without the painful deterrent of taxation.     

 Section 1031 of the IRS code allows investors to defer federal capital gains taxes on the exchange of like-kind investment properties. If you have a property that qualifies for a Starker Exchange, contact me today for more information on completing a Bandon 1031 Exchange. I can help you get set up with a qualified exchange intermediary to ensure compliance with the sometimes complicated rules surrounding this transaction.

For more information visit Internal Revenue Code Section 1031