Five More Things to Know About 1031 Exchanges
Robert G. Hetsler, Jr. J.D. CPA
Inspirational Leader, Spiritual Warrior, Life & Business Strategist, Author, Entrepreneur Talks about #Overcoming Adversity, #Leadership through Inspiration, #Belief System, #Success #Importance of Progress
Recently, we introduced you to five key things you have to know before beginning a #1031 exchange. While using the provisions of section 1031 of the US Tax Code is a great way to defer capital gains tax on investment property, you can’t enter into the exchange transaction blindly. There are far too many pitfalls waiting for the unwary investor. Pitfalls that can jeopardize the tax-deferred nature of these transactions.
Beware The Boot
If you receive any cash during your 1031 exchange, the value is known as “boot.” Boot is immediately taxable to you as a partial capital gain. You are able to receive boot and still have a valid exchange. It is just important to understand that this will be considered a taxable event in the tax year of your exchange.
Boot Comes In Other Forms, Too
It isn’t just cash that can be considered boot. If, at the conclusion of your 1031 exchange, your debt liability goes down, that will also be treated as income to you and you will be taxed accordingly.
Timing Matters
The IRS is very strict when it comes to 1031 exchanges. While they allow you to defer taxes, they also hold you to critical deadlines in order to do so. The first is known as the “45 Day Rule.” This rule requires you to identify your replacement property within 45 days of the sale of your relinquished property. Failing to do so will negate the exchange and taxes will be due.
You Can Designate Multiple Replacement Properties
To make it easier to complete a successful exchange, the IRS permits you to name more than one replacement property. Of course, this is also subject to strict limitations. You can name up to three so long as you close on one of them within the requisite time limitations. Alternatively, you can nominate more than three if they adhere to a valuation requirement (the 200% rule).
Timing Matters (Again!)
In keeping with their strict requirements, the IRS also requires you to close on your replacement property within 180 days of the sale of your relinquished property. The clock starts ticking on the day you sell and runs concurrently with the 45-Day-Rule.
To learn more about 1031 exchanges or our qualified intermediary and replacement property locator services, please visit our website.