Question from Chapter 9-Preparing for Uncle Sam

Q: I’d like to minimize my tax burden though a tax deferred exchange but I’ve heard that the IRS has so many guidelines that I’d need to meet to make this happen. Can you walk me through some of these guidelines so I can take advantage of these tax savings?

A: A 1031 Tax-deferred exchange is a powerful way to build wealth through real estate.
You can sell investment property and transfer all the gain to another, larger investment property or several other properties and defer the capital gain taxes due on a straight sale.
If the property is held as investment property and is exchanged into property that is like that which was sold, this is called “like-kind”. Prior to the closing of the sale of the old relinquished property, the seller must enter into an exchange agreement with a qualified intermediary or accomodator.
The accomodator structures the exchange transaction to meet IRS code requirements.
Make sure the accomodator is an unrelated party, is not anyone close to you and is properly insured and bonded.
The three basic IRS exchange guidelines are:
1. The purchase price of the replacement property must be equal or greater than the sold property.
2. The debt on the replacement property cannot be less than the debt on the sold property
3. You must use the entire net sale proceeds from the sold property to acquire the replacement property.
There are strict time-frame requirements. You must identify the replacement property within 45 days of close of escrow of the relinquished property and you must close escrow no later than 180 days from the closing date of the relinquished property.
There are many other rules and details to consider in a tax- deferred exchange in addition to these basic rules.
Read the entire Chapter 9 of the book “Get the Best Deal When Selling Your Home” to find out how to qualify for a tax-deferred exchange.