Many novice investors cringe at how complicated paying taxes on real estate sales can be. If you find yourself in this situation, let a skilled attorney at Sparks Law help you cut through some of the Internal Revenue Service Codes, including a lesser-known rule called 1031 Exchanges.
If you are holding property as an investment or using it in a business but wish to sell it at a profit and use the money to buy another investment property, you may be able to defer or escape capital gains taxes under Section 1031 of the IRS Code. An experienced Alpharetta 1031 exchanges lawyer can review your real estate investments and advise you about using this property rollover tactic.
Not all real estate qualifies for a 1031 Exchange. Primary residences are never included, nor is land outside the United States. Investors who buy properties to fix and flip them do not qualify because they purchased to resell. However, vacant land qualifies under this rule.
An exchange is possible if the old and new properties are held for investment or used in business. For example, an investor who sells a vacant lot can use the money to invest in a rental condo.
Once investors close on the sale of their property, they must identify the new property within 45 days. They can enter a purchase contract or make a list with specifics about one to three properties they are negotiating to buy. Additional rules attach if the investor identifies more than three properties.
A qualified intermediary must accept the list. By the 180th day after the sale of the old property, the investor must close on at least one of the properties on the list to be eligible for a 1031 exchange. A qualified attorney at our Alpharetta office can further explain these 1031 exchange deadlines and help meet them.
There are several requirements to qualify for a 1031 exchange in Alpharetta, which our well-practiced attorneys can further explain. These include working with a qualified intermediary, reinvesting profits, and matching the titles of the properties.
A qualified intermediary holds the sale funds in a separate escrow fund for an investor until they are released to purchase the new property. The intermediary also drafts the IRS documents required for a 1031 exchange and cannot be a family member or business associate from the past two years. Our skilled Alpharetta attorneys can act as qualified intermediaries for clients’ 1031 exchanges.
When an investor plans to defer capital gain taxes on real estate under a 1031 exchange, the new property must be worth at least as much as the property sold. Additionally, all the profits from the first sale must be invested in the second property.
However, investors can deduct expenses from the first sale, such as commissions and closing costs. Also, the closing expenses of the new property and capital improvements count toward the purchase.
For example, say an investor sells an apartment building for $1 million, but with closing costs he walks away with a net profit of $970,000. The net profit is the amount that will need to be invested in the new property. Our knowledgeable local attorneys can assist clients looking for 1031 investment property and ensure the transactions comply with IRS Code.
Investors must follow other rules for a 1031 to succeed. For example, the title to the new property must reflect the identical owners of the old property. A husband and wife who owned the original property cannot title the new property in one name without the other. A business entity such as a corporation, limited liability company, or partnership that owns an investment property must be the owner of the new property purchased with the proceeds of the original one.
It is important to note that the capital gains taxes go away upon the death(s) of the investor(s). The taxes can also be minimized if the investors are married and move into an investment property as their primary residence. They must hang on to the property for five years and live in it for two to exempt $500,000 in taxes when they do sell.
The IRS offers ways for real estate investors to minimize taxes. One method is through a 1031 exchange. If you are interested in this unique opportunity, call our office to discuss and learn more. At Sparks Law, an Alpharetta 1031 exchanges lawyer can explain this rule and help you take advantage of it.