So the curiosity of finding a 1031 Exchange property in California has brought you here. Well, you’ve landed on the right page. But before we tell you about 1031 Exchange rules in California, it would be better if you pay attention to a few other things related to 1031 Exchanges first.
As 1031 Exchanges allow investors to exchange like-kind properties and defer capital gains taxes, more and more investors have started exchanging out their properties using this unique tax-deferred exchange (consider your case). Consequently, finding an ideal 1031 Exchange replacement property, when required, has become a bit difficult, particularly in a state like California. But, what made a 1031 Exchange investment so popular?
Apart from the opportunity to defer capital gains taxes, 1031 Exchanges also provide broad options when it comes to the types of properties that can be exchanged. For example, if you currently own a rental property, then you can exchange it for industrial properties, multi-family properties, student-housing properties, etc., and defer capital gains taxes. Not only this, but 1031 Exchange investors can also exchange a depreciated property for an institutional-grade property.
1031 Exchange California Rules 2020 –
The IRS has laid down a set of universal 1031 exchange rules that stay the same in every state. Here are the general 1031 exchange rules:
- Properties must be like-kind. If you are selling an investment property, your replacement property must also be used for business purposes.
- You must hire a Qualified Intermediary (QI). From identifying a replacement property to buying the same, your QI does all the tasks.
- You must identify one or more replacement properties in 45 days from the sale of your relinquished property. Submit written identification to the IRS before the deadline.
- You cannot touch the sale proceeds. As soon as you sell your investment property, transfer the proceeds into an escrow account.
- Buy the identified property within 180 days. You won’t get any extra day post your exchange period.
- Submit for 8824 at the time filing taxes along with other documents.
Time plays a crucial role in 1031 Exchanges, and you must pay extra attention to deadlines, as failing to meet any of the deadlines will immediately end your chances of completing a 1031 Exchange. A typical 1031 Exchange, also known as a delayed or starker exchange, requires investors to sell their relinquished property first and then acquire the replacement property. However, this isn’t the case in all 1031 Exchanges. For example, a simultaneous exchange requires investors to sell the relinquished property and buy the replacement property at the same time. Whereas, a reverse exchange is a type of transaction in which an investor buys the replacement property first and then closes on the sale of their relinquished property. Therefore, as an investor, you must know which 1031 Exchange will be more suitable for you.
You can identify any number of investment properties using any of the following rules:
- The Three-Property Rule – It states that a 1031 Exchange investor can identify up to three replacement properties and acquire one, two, or all three of them within 180 days, regardless of the value of the property.
- The 200% Rule – Using this rule, you can identify more than one replacement properties as long as the fair market value of all identified properties doesn’t exceed 200% of the fair market value of the relinquished property.
- 95% Rule – This rule allows you to identify any number of replacement properties as long as the fair market value of the acquired property is 95% of the fair market value of all identified properties.
Therefore, using any of the above-mentioned rules, you can identify any number of replacement properties in California for your 1031 Exchange. Not to mention, a 1031 exchange requires an expert’s assistance. If it’s your first 1031 exchange, speak to an advisor before signing the agreement.