A 1031 exchange is a tax strategy that allows you to defer paying capital gains taxes when you sell an investment property, as long as you reinvest the proceeds into a new, like-kind property. This means you can sell one property and buy another similar one without immediately paying taxes on any gains from the sale.
These like-kind exchanges are covered under Section 1031 of the Internal Revenue Code (hence the name "1031 Exchanges") and apply to federal capital gains taxes. However, each state has their own tax code, and may have different rules for real estate tax withholdings, the ability to complete a tax-deferred sale, or the rules around like-kind exchanges. Below we'll dive deep into these state-level specifics.
In North Carolina, there is a mandatory tax withholding requirement for the sale of real property by nonresident individuals or entities. The withholding rate is 4% of the sales price. The buyer is responsible for filing a return with the Secretary of the State of North Carolina within 15 days of the sale closing. This requirement is outlined in NC Section 105-163.
Here are the key points regarding the real estate tax withholding rules for North Carolina when dealing with nonresident sellers:
For further assistance or to obtain forms and instructions, nonresident sellers can contact the North Carolina Department of Revenue or visit their website.
The Combined Rate accounts for Federal, State, and Local tax rate on capital gains income, the 3.8 percent Surtax on capital gains and the marginal effect of Pease Limitations (which results in a tax rate increase of 1.18 percent).
North Carolina has a flat income tax rate of 5.75% of federal taxable income.
Many states recognize and follow the federal rules for a qualifying 1031 exchange. We recommending reviewing these resources for 1031 exchanges at the federal level - learn about the rules for an exchange, the key deadlines you must meet, and why you are required to work with a Qualified Intermediary like Deferred.com.
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