The 1031 Exchange | A Miami Investors Tax Deferred Weapon of Choice
The average capital gains tax across all states is 28.7 percent. Were you aware of the 1031 Exchange to defer taxes on your profit when you sell? If not, read on for the most effective loophole in netting you more and increasing your real estate portfolio faster!
Welcome to the 1031 exchange program.
This is a known loophole by savvy investors who use it over & over to keep their profits to themselves. Provided a property has not been personally used, such as a principal residence or second home, it should qualify for a 1031 Exchange. Internal Revenue Code Section 1031 allows you the opportunity to defer capital gains taxes owed upon the sale of investment or income property by exchanging the property for other like kind property. Based on your overall investment goals, you may have a financial or tax advisor, but in the end, you’re the one writing the check to the Internal Revenue Service. The IRS has specific guidelines and a qualified Intermediary provides you a safe tax deferred exchange. Ultimately, it is up to you if you decide to sell and pay the capital gains tax or have it deferred.
Capital gains is the difference between what a property sells for and the adjusted basis in the property.
Here’s an example:
- Purchase Price $5M
- – Sale Price $7M
- (factoring no improvements or depreciation)
- Costs of Sale ~ $440,000
- State Tax Rate ~ .07%
- approximately $343,000 paid out as Capital Gains Tax
How do you go about deferring taxes paid on profits when selling real estate?
- Use a 1031 Exchange Addendum as part of the Purchase Contract.
- Use a Qualified 1031 Exchange Intermediary or QI.
- The QI’s services must be retained prior to the closing of the existing property. Waiting until after the closing will be too late!
A QI is a professional company that specializes in processing 1031 exchanges. The QI is hired to prepare the exchange documentation and hold the sale proceeds during the time between the sale of the existing (relinquished) property and the acquisition of the new property as a replacement property. The law requires the proceeds from the sale of the existing property be kept from your control until a suitable replacement property is identified and ultimately transferred to you by the QI.
Upon closing the sale of the relinquished property, you must adhere to two timetables which both begin on the date the existing property is transferred:
First, you must identify in writing possible replacement properties within 45 days of the closing. The QI will provide you with a form to list potential replacement properties. Once you have completed the property identification form, you must fax or mail it to the QI by midnight on the 45th day. The inability to acquire any of the identified properties will cause an exchange to fail. There is no mechanism for alternative property selection once the 45 day identification period has elapsed.
Second, you must acquire at least one of the identified properties prior to the expiration of the 180 day replacement period. Again, this period begins on the day the relinquished property was transferred. You may buy more than one of the identified properties provided they all close within the 180 day period.
Just like Individual Retirement Accounts (IRA’s), if you follow the rules and guidelines, the law allows for tax deferral until the property is ultimately sold and you receive the cash. Many investors use this exchange over and over again as they move, flip & grow their real estate investment portfolio.
You may take cash out at the closing of the sale property or upon completion of the exchange. Since you will be taxed on any proceeds being removed from the exchange, it will also be necessary to determine what your capital gain would be had you simply sold your property. If you take cash out equal to or more than your capital gain, then you will be paying all the tax owed anyway.
This material is provided for informational purposes only and is not to be construed as tax advice. The reader is strongly advised to speak with a tax consultant.
Is there anything I can do for you? I would love to hear from you. Contact me today to sell your Miami property and to secure a referral for the most reputable of qualified Intermediaries to assist you best on a 1031 exchange. Contact my office at 786.27.DREAM or toll free at 888.38.DREAM.
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