What Are The “45-Day Nomination Period” Rules For A 1031 Exchange?
A 1031 tax-deferred exchange allows investors to reinvest the profits from the trade of investment property in one or more replacement properties without inviting immediate federal (and most state) capital gains taxes on the appreciated value. When the sale and purchase fulfill the 1031 Exchange standards, taxes are delayed until the newly procured property is sold. This deferral strategy can be duplicated through any number of exchanges until the tax liability crosses into the individual’s estate upon death.
The most critical element in a 1031 tax-deferred exchange is locating a like-kind property within the 45-day identification period allotted by the IRS. We highly recommend our investors to be aware of the criteria and their preferences for replacement properties before enrolling into a contract to sell their existing properties. Investors should also carefully examine with their advisors whether an exchange is beneficial for them.
For example, an exchange will be flagged if any of the properties will or has been used for purposes of personal residence. It will also be unsuitable when the investor wants to recognize a capital loss, as recognition of capital losses is deferred under Section 1031 as well as recognition of capital gains.
For a successful 1031 tax deferred exchange, we urge you to contact us early in the process. Our qualified real estate experts will help you develop investment plans for replacement property acquisition. Once we have mutually decided on a strategy, we will assist you in engaging the services of a Qualified Intermediary (QI).
Who is a Qualified Intermediary?
An independent third party should be appointed as a Qualified Intermediary (QI). The QI is expected to hold the proceeds of the sale of the relinquished property until the gains are reinvested. A written “exchange agreement” must be enacted between the investor and the QI which assists in protecting the investor from having “constructive receipt” of the exchange funds during the exchange period. QI’s ensure that rules are correctly followed, and that the equity is protected. IRC rules dictate the investor to have a QI to perform a 1031 Exchange .
A 1031 exchange can be a useful tool for wealth creation. However, investors must operate with their professional tax advisor to meet the requirements of IRC Section 1031, as negligence to comply with IRC Section 1031 or an unfavorable tax ruling may revoke deferral of capital gains and follow immediate tax liabilities, including tax penalties.
Let’s review this case study for more clarity regarding a 1031 tax-deferred exchange –
An investor has a $200,000 capital gain and incurs a tax liability of approximately $70,000 in combined taxes when the property is traded. Only $130,000 is available to reinvest in another property. Assuming a 25% down payment and a 75% loan-to-value ratio, the seller would just be able to purchase a $520,000 new property.
If the same investor chose to exchange, however, he or she would be able to reinvest the entire $200,000 of equity in the investment of $800,000 in real estate, assuming the same down payment and loan-to-value ratios.
As the preceding example explains, tax-deferred exchanges enable investors to defer capital gain taxes as well as promote meaningful portfolio growth and increases return on investment. You get to grow your wealth faster by keeping all your money operating for you instead of paying taxes. The government promotes 1031 tax-deferred exchanges so that people will invest in real estate resulting in growing economy and a healthy community. A 1031 exchange is the best way to defer the payment of these taxes. That is why it is referred to as a “1031 tax-deferred exchange”.
1031 Tax-Deferred Exchange enables your money to churn the maximum profit for you. However, the exchange process is extremely complex in nature, and it would be wise to seek guidance from expert professionals. We have extensive experience in handling highly profitable exchanges for our varied client base.For consultation and assistance regarding 1031 exchange call –888-993-0590 or email us at info@1031xchange.com.
