We found information regarding 1031 exchanges and tax obligations on an exchange between two calendar years. Typically we have found that the Internal Revenue Service ("IRS") will not challenge or disqualify a 1031 Exchange transaction as long as the investor has followed the Safe Harbor provisions or guidelines provided by the Treasury Regulations. What this means is to use a qualified 1031 intermediary who will hold the sales proceeds until a like kind property is located, so the sale proceeds never actually reached your account. If you do a 1031 by yourself and receive the funds from the sold property then you still may have an option on when to account for the taxes.
If an exchange fails, funds are returned to the investor and taxes are owed. But if a failed exchange runs over two different calendar years, investors may have an option on when to pay taxes. Let’s say the sold property closes escrow on December 1, 2011 and as of the 45th day of the exchange, the investor has not found a replacement property so the the exchange is now cancelled. The sale proceeds from the sold property must then be returned to the investor in January 2012 whic is the 46th day of the exchange. The investor has the option to recognize the tax liability either in 2011 or 2012. The investor sold the property in 2011, but they had the right to the benefit in 2012. The investor should contact their accountant for the best option, but this scenario does provide such an option.
Showing posts with label tax deferred. Show all posts
Showing posts with label tax deferred. Show all posts
Tuesday, December 13, 2011
Sunday, July 18, 2010
The 1031 Exchange Process Taken Step by Step
1. You will need to set up an exchange account with an authorized 1031 exchange firm. The 1031 account has to be opened before the close of escrow on the property being sold. It can be done in a rush, but it is best to have this process planned in advance with the escrow company.
2. Write up the 1031 Exchange terminology in the sales contract or escrow instructions. The appropriate 1031 language should be added to the sales contract or escrow instructions for the property being sold. The exchange company can draw up the proper language.
3. Execute the exchange agreement with the escrow company and exchange firm with the necessary signatures and documents.
4. A like kind replacement property must be located within forty five days. A like kind property essentially means real estate for real estate. This like kind property must be located within forty five days per the IRS requirement. Once the replacement property has been identified then the sale and escrow must be completed within six months.
5. Forward the 45 day identification letter. This identification letter has to be submitted within forty five days, and the replacement property must be located and identified. This is typically the most difficult part since you need to secure the acquisition of a second property within this six week period.
6. Forward funds for deposits, this can be done from a 1031 exchange account. There is typically a form from the 1031 exchange company. It is also possible for the deposit to come from your personal account with a reimbursement later.
7. Then you must complete the execution of the escrow documents from both parties on your replacement property, and fund the purchase with your prior closed escrow funds. If the replacement property requires a loan, or it is an income property then other steps maybe needed. Thus identifying an experienced 1031 firm will assist in more complicated exchanges. Also additional funds may be needed if the replacement property has higher value then the prior sold property. Again the 1031 exchange firm can assist with these additional steps.
2. Write up the 1031 Exchange terminology in the sales contract or escrow instructions. The appropriate 1031 language should be added to the sales contract or escrow instructions for the property being sold. The exchange company can draw up the proper language.
3. Execute the exchange agreement with the escrow company and exchange firm with the necessary signatures and documents.
4. A like kind replacement property must be located within forty five days. A like kind property essentially means real estate for real estate. This like kind property must be located within forty five days per the IRS requirement. Once the replacement property has been identified then the sale and escrow must be completed within six months.
5. Forward the 45 day identification letter. This identification letter has to be submitted within forty five days, and the replacement property must be located and identified. This is typically the most difficult part since you need to secure the acquisition of a second property within this six week period.
6. Forward funds for deposits, this can be done from a 1031 exchange account. There is typically a form from the 1031 exchange company. It is also possible for the deposit to come from your personal account with a reimbursement later.
7. Then you must complete the execution of the escrow documents from both parties on your replacement property, and fund the purchase with your prior closed escrow funds. If the replacement property requires a loan, or it is an income property then other steps maybe needed. Thus identifying an experienced 1031 firm will assist in more complicated exchanges. Also additional funds may be needed if the replacement property has higher value then the prior sold property. Again the 1031 exchange firm can assist with these additional steps.
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