Question
ARTE's Answer
When engaging in a 1031 exchange, the primary goal is to defer capital gains taxes by reinvesting the proceeds from the sale of your relinquished property into a like-kind replacement property. To achieve full tax deferral, you need to adhere to specific reinvestment guidelines.
- Reinvestment Amount: To defer all capital gains taxes, you must reinvest the entire net sales proceeds from the sale of your relinquished property into the replacement property. This means that the purchase price of the replacement property should be equal to or greater than the sales price of the relinquished property, minus any allowable closing costs.
- Debt Replacement: If your relinquished property was subject to a mortgage, you must also ensure that the debt on the replacement property is equal to or greater than the debt on the relinquished property. Alternatively, you can offset the debt requirement by adding additional cash to the transaction.
- Exchange Expenses: Certain transactional expenses related to the exchange, such as qualified intermediary fees, escrow closing costs, and broker commissions, can be deducted from the contract price when determining the realized gain. These expenses are considered exchange expenses and do not count as boot, which would otherwise trigger taxable gain.
Example: Let's say you sold a rental property for $500,000, with $20,000 in allowable closing costs, and had an existing mortgage of $150,000. After paying off the mortgage and closing costs, you have $330,000 in net proceeds. To achieve full tax deferral, you should:
- Purchase a replacement property for at least $500,000.
- Reinvest the entire $330,000 net proceeds into the replacement property.
- Ensure the new property has a mortgage of at least $150,000, or invest additional cash to cover any shortfall in debt.
At Deferred.com, we offer qualified intermediary services to facilitate your 1031 exchange. By using our "No Fee Exchange" service, you can save money on intermediary fees, allowing you to maximize your reinvestment potential. As your qualified intermediary, we ensure that the exchange process is seamless and compliant with IRS regulations, helping you achieve your investment goals while deferring capital gains taxes.
By following these guidelines and utilizing our services at Deferred.com, you can effectively defer your capital gains taxes and continue to build wealth through strategic real estate investments.
Have more questions? Call us at 866-442-1031 or send an email to support@deferred.com to talk with an exchange officer at Deferred.
Sources
- What To Do About Exchange Expenses in a Section 1031 Exchange? (Article)
- Goolsby v. Commissioner
- Rev. Rul. 2002-83 (Related Party Exchanges)
- TAM 200039005 (Failed Reverse Exchanges)
- Deferring Losses On The Sale of Property Using 1031 Exchanges
- 1.1031(k)–1 (IRS Code of Federal Regulations)
- TD 8535 (Like-Kind Exchanges of Real Property-Coordination with Section 453)
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