In 1031 exchange there are many regulations and standards to meet in order to delay real estate capital gains tax. It’s recapture of depreciation already used in the past on your real estate properties.
A joint combination of a skilled 1031 exchange broker, real estate tax expert, CPA and Intermediary that allows the trade to go through in a legitimate manner and meeting all the rules of the IRS is absolutely necessary.
One mistake could violate the entire transaction causing undo harm to the owner and large tax consequences to ownership or seller.
From the holding of the funds, the timing of the deal, the identification of the replacement property, the equalization of the boot or equity and the debt for another property to replace the one you sell, the proper replacement property that meets the criteria of the seller, and the overall rules that IRS demands not to void the deal must be met.
A proper representation such as an independent intermediary selected to process the transaction from beginning to end, the 45-day identification rule to find and describe other properties that meet the proper equity and debt guideline without going over the limit of sale value (200% of current value).
Picking three properties that match your criteria or more, if you desire to close on 95% of additional identification deals above the three which may be difficult. Closing within 180 days of your sale on any of the above-identified properties. These trades are for investment properties or business, not your personal residence.
Another way to delay real estate capital gains tax in 1031 exchange is with vacation houses. If you can prove that a vacation house is used primarily for rental, not your residence, it can qualify under certain conditions. Selling your business that has real estate connected to it is permissible as long as you are valuing the real estate and its personal property separately from the business value.
When doing a 1031 exchange keep in mind you can currently trade until you die and keep delaying the capital gains tax if you are careful but you may run out of depreciation in the process.
There are ways to gain additional depreciation in 1031 exchange by purchasing more expensive properties and adding more debt to the purchase. Upon death, your heirs could appraise the property at the time of death and get stepped up value and possibly avoid the basis that you purchased the same deal many years earlier avoiding a tax to their inheritance. This takes the place of needing to trade again.
Raw land can be exchanged for income property gaining the owner a new depreciation schedule to follow since the land had no depreciation benefits and having a lower tax to pay on the income.
Aggravating properties with many management issues and the constant fixing and changing it tenants could also be a reason to do a 1031 trade to a simple triple net property, NNN, Net Net Net property without any responsibility to the owner.
