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1031 Exchange
Considering selling a business property or investment and then buying a new piece of real estate with a similar purpose? Interested in tax savings? Consider a 1031 exchange.
What is a 1031 Exchange?
A 1031 Exchange is a tax deferral whereby one reinvests the money from the sale of business property or investment into a new property with similar purposes. It is similar to a traditional sale, but with a 1031 exchange the transaction is treated as an exchange. The taxpayer can defer the capital gains tax that would otherwise be incurred on the initial sale.
What is the benefit?
Because an exchange is not taxable while a sale is taxable, the benefit of a 1031 Exchange is tax savings. Depending on federal and state rates the capital gains tax can be 20-30%. By exchanging properties, you increase your purchasing power.
Section 1031 of the Internal Revenue Code outlines the necessary requirements for a 1031 exchange. Several aspects of this code are crucial to understand if you are considering an exchange for your next South Dakota real estate purchase.
"Like Kind" Standards: The transaction must meet “like kind” standards. A “like kind” property is one that is similar in nature. For example, if you sell a business property then the purchase for the exchange also needs to be a business property. With real estate purchases it is critical that the exchange not be a personal residence or even a second home.
Total Purchase Price: The total purchase price of the “like kind” property must be equal to or greater than the sale price for the original property. For example, if you sell a business property for $100,000, the purchased property for the exchange would have to be greater than or equal to $100,000. You must be trading up.
Time Periods: The time periods for a 1031 exchange are important to understand and follow. The first time period is the identification period. This period is the 45 days after the sale of the original property. During this time the exchanger must identify “like kind” properties of interest. Following the identification period is the exchange period. As the title implies, this is the time period whereby the purchase of the “like kind” property takes place. As opposed to the fixed time period for the identification period, the exchange period varies in length. The time period however is not extendable under any circumstances so be sure to research the time period for your transaction and abide by it.
This article is meant to provide our South Dakota real estate buyers with an introduction to 1031 exchanges. Please contact us for more information.
What is a 1031 Exchange?
A 1031 Exchange is a tax deferral whereby one reinvests the money from the sale of business property or investment into a new property with similar purposes. It is similar to a traditional sale, but with a 1031 exchange the transaction is treated as an exchange. The taxpayer can defer the capital gains tax that would otherwise be incurred on the initial sale.
What is the benefit?
Because an exchange is not taxable while a sale is taxable, the benefit of a 1031 Exchange is tax savings. Depending on federal and state rates the capital gains tax can be 20-30%. By exchanging properties, you increase your purchasing power.
Section 1031 of the Internal Revenue Code outlines the necessary requirements for a 1031 exchange. Several aspects of this code are crucial to understand if you are considering an exchange for your next South Dakota real estate purchase.
"Like Kind" Standards: The transaction must meet “like kind” standards. A “like kind” property is one that is similar in nature. For example, if you sell a business property then the purchase for the exchange also needs to be a business property. With real estate purchases it is critical that the exchange not be a personal residence or even a second home.
Total Purchase Price: The total purchase price of the “like kind” property must be equal to or greater than the sale price for the original property. For example, if you sell a business property for $100,000, the purchased property for the exchange would have to be greater than or equal to $100,000. You must be trading up.
Time Periods: The time periods for a 1031 exchange are important to understand and follow. The first time period is the identification period. This period is the 45 days after the sale of the original property. During this time the exchanger must identify “like kind” properties of interest. Following the identification period is the exchange period. As the title implies, this is the time period whereby the purchase of the “like kind” property takes place. As opposed to the fixed time period for the identification period, the exchange period varies in length. The time period however is not extendable under any circumstances so be sure to research the time period for your transaction and abide by it.
This article is meant to provide our South Dakota real estate buyers with an introduction to 1031 exchanges. Please contact us for more information.