1031 Exchange - How to Defer Your Capital Gain
1031 Exchange is a way that helps not only businesses and business owners but also home investment owners to sell their property and buy another one without paying taxes for capital gains at that moment. The property that you are willing to sell is called relinquished property, and the one you would like to buy are call replacement property. A key aspect of 1031 exchange is that the selling of the relingquished property & buying of the replacement property is considered as one transation. Thus, you are not allowed to handle the proceeds you have from selling your property, instead you have to choose a third party that will help you handle the funds. The third party is call Qualified Intermediary. Professional real estate agents and escrow companies are able to help you find a qualified intermediary that will help you go through the transaction.
The above is the basis information for property owners who are planning to exchange their current property with another one but still defer taxes for capital gains. There are deeper levels of information that investors, buyers selling & buying rental properties need to know before doing a 1031 Exchange.
Truc Doan
VUI Group President
Real Estate - Mortgage Loan - Escrow - Property Management
After having your qualified intermediary, you will sign an exchange agreement with them that states that you agree to be assigning the seller's rights for the relinquished property as well as the buyer's rights for the replacement property to them, and thus they can control the funds involved in the exchange on your behalf.
Beside that, exchanging properties exploiting section 1031 of tax code is quite similar to selling & buying properties that we know. However, there are numbers you need to remember when doing a 1031 exchange.
45: this is the timeframe you have after the sale of your relinquished property to identify the replacement property and deliver it to your qualified intermediary.
180: buying of the replacement property must be done within 180 days that begins from the date of the sale of the relinquished one.
Both 45 and 180 days are calendar days, not business days.
For example: the sale of your house is dated on Jan 1, you have to have your replacement house identified and delivered to the intermediary by Feb 15. Then the purchase of the replacement must be closed by June 29 (or June 28 for leap years).
Truc Doan
VUI Group President
Real Estate - Mortgage Loan - Escrow - Property Management