Real Estate Investors: Be Aware Of Capital Gains Tax Relief

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By: Christel Silver Special to the Boca and Delray newspapers

Did you know that you can avoid paying taxes as an investor on your real estate capital gains tax forever? You simply follow the rules of a 1031 exchange. So how can you get started? First consult a CPA who can advise you whether a 1031 exchange is best for you.

What is a 1031 exchange? If you are selling a property used for investment or business and purchase a property for investment or business, you can defer all capital gains taxes.  You can do this over and over again and when you die, your estate avoids the capital gains taxes.  Your heirs receive the property based on the current value of the property at the time they inherit it.

The delayed exchange, also called “Starker” exchange is the most popular exchange.  T.J. Starker sued the Commissioner of IRS successfully in the 1970’s arguing that the swap or exchange did not have to be simultaneous. The IRS established published regulations in 1991 clarifying the procedures in accordance with revised Section 1031(a) 3, including time limits for identifying and completing the exchange.

The seller of the investment must select a qualified intermediary who will receive the proceeds of the sale, which will be used to purchase a ”replacement” property of equal or greater value. There are two deadlines to carefully comply with: 180 day and 45 day deadlines.

The investor has 180 days to complete the purchase of the replacement property: the closing has to take place no later than 180 days after the sale of the relinquished property.

The new property must be identified within 45 days after the sale of the relinquished property.  The investor can identify up to 3 properties (and with some restrictions even more).

The Property must qualify for an exchange: must be an investment or business property.  (Land could qualify if it was held for speculation).

You can sell one property and buy 2 or more – or sell 2 or more properties and buy one.

What are the benefits of this exchange?

You can purchase a more expensive property adding the tax savings to your proceeds, as you acquire additional equity to reinvest.

You can exchange raw land and buy an income producing property.

You can exchange residential property to commercial or vice versa.

You can buy a property in a different area – but not outside the US.

You can consolidate different properties into one which may be easier to manage.

You can exchange a property with high management fees to purchase a property that is easier to manage with less management fees.

You have a property with significant equity and would like to leverage the equity into additional acquisitions.

The fact that you are using the 1031 exchange the contract must be assignable and must be disclosed in the sale and purchase.

If you are using the 1031 exchange, the contract must be assignable and include a disclosure in the sale and the purchase, but it is a mere disclosure and there is no extra costs involved for buyer or seller.

Besides the delayed exchange, there are also other exchanges possible:

Reverse Exchange: You buy a property and within 45 days you file a form that your replacement property will be sold and the improvement sale has to be completed within 180 days.

Improvement Exchange:  You buy a “fixer upper” and use unused proceeds to fix up the property. The improvements have to be completed within the 180-day period.

Simultaneous Exchange: Sales and Purchase happen at the same time.

Some questions:

What if I change my mind? The intermediary is holding your proceeds – you change your mind and decide to pay the capital gains tax and not go forward with the exchange: the intermediator is not allowed to disburse funds between day 45 and 180.

Can I get money out of the exchange tax free? Yes, but the exchange has to be completed first and you can refinance the property.

If I have closed on the property can still hire an intermediary? No, the intermediary must be hired in advance of closing of the relinquished property.

Is the exchange worth the trouble? Yes, if you work with a qualified Intermediary, they will guide you through the process and comply with IRS regulations and you are gaining equity.

I am an international investor, can I use the 1031 exchange? Yes, but the properties have to be located in the US.

I have helped investors using the delayed exchange more than once and they are increasing their investment portfolio with the tax savings. So what are you waiting for?

About Christel Silver

Christel Silver is a full time Broker/Owner of Silver International Realty servicing the East Coast of South Florida. In 1985 she was licensed in Maryland and Washington DC as a Realtor and later as a Certified Residential Appraiser and Associate Broker and has been in Florida since 2001. The National Association of Realtor’s (NAR) President appointed her (2010-2014) and again for 2018 as the President’s Liaison to Germany, where she grew up and worked at the Justice Department for 17 years prior to coming to this country. The Germany Real Estate Organization (IVD) has an agreement with the NAR and she is an International member of this organization. Christel is a Certified International Property Specialist (CIPS), and a certified speaker teaching CIPS classes. Ms. Silver served the Florida Certified Residential Specialist (CRS) Chapter as President, as Regional Vice President helping Chapters to grow, and as a member of the Board of Directors for two years. She served previously as an ambassador.  Fifty percent of her business is in the International arena. For more information visit www.silverhouses.com.