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1031 Like-Kind Exchange tax de...

1031 Like-Kind Exchange tax deferral program

  • September 10, 2020

You can avoid paying income tax on the sale of real property held for business purposes says Meghan O. Mossey, an attorney at SRDD Law.

If you are contemplating the sale of your investment property, the 1031 Like-Kind Exchange tax deferral program should not be overlooked.  Based on Section 1031 of the Internal Revenue Code the Exchange is almost too good to be true.  This benefit is only available for owners of investment properties, and it allows the property owner, to sell their original property, take all gains and reinvest them into a replacement investment property deferring all capital gains taxes.  The decision to use a 1031 must be made before the closing of the sale.

There is no cookie cutter procedure for a 1031 Exchange, but generally speaking, the original property must be sold, and all sale proceeds placed with a 1031 exchange agent.  The exchanger then must identify possible replacement properties within 45 days , and close on the replacement property within six months from the sale of the original property.  It is important that the purchase price of the new property (or properties) be at least the sales price of the original property.  The 1031 exchange may be repeated again and again, continuing to re-invest the capital gains liability and leveraging those funds to acquire real property.

Proper Legal Counsel

This is where proper legal counsel can help you to reach your investment goals and avoid the legal pitfalls.  It is possible to own one property and then own the replacement property with another investor, for so long as title is properly held with a well drafted co-ownership agreement.  A property owner can sell two smaller investment properties and replace them with a larger property.  The real estate holding company exchanger can even change their ownership interests, for so long as it is done thoughtfully with the counsel of your tax professional and attorney.  It is also possible to do a Reverse 1031 Exchange where the replacement property is purchased prior to the sale of the original property.  The possibilities are endless.

If your concerns include estate succession, under the current tax law, a property owner can do endless 1031 exchanges, continually deferring their capital tax liability.  Depending on how the property is owned, upon the property owner’s death, the beneficiaries of their estate will obtain a step-up basis for the real property to the date of death value and the inherited capital gain tax liability will be eliminated. 

These types of 1031 exchanges require careful planning to avoid losing the 1031 status, and it is imperative that proper counsel is obtained to ensure this.  If you are contemplating selling your investment real property, call the experienced real estate counsel at SRDD law to discuss your options.

About SRDD Law

Stenger, Roberts, Davis & Diamond, LLP (SRDD Law) is one of the largest law firms in the Mid-Hudson Valley. With offices in Wappingers Falls and Poughkeepsie, we have the available resources to handle any category of legal needs. Above all, we will take the time to listen to your problems individually. Contact us today.

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