1031|Tax Free|Tax Deferred|Exchange|Arizona
1031 Exchanges many times referred to as “Tax Free” are actually “Tax Deferred” and appear to be very complicated transactions involving real estate in Arizona. Not so, they are very straightforward with proper planning and implementation. With the implementation of the changes in the Capital Gain rules as well as the implementation of further income taxation as a result of “Obamacare“, it is obvious that 1031 Tax Free Exchanges will make a comeback as a vehicle to defer capital gains taxation.
The rules are actually quite simple:
- A qualified intermediary must be in control of the proceeds from the sale of the property.
- You, the seller, cannot receive the funds from the sale of the real estate in Arizona or out of state.
- From the sale date of the real estate, you have 45 days to identify the real estate property you wish to exchange for.
- You have 180 days to close and fund the real estate property you are exchanging for inclusive of the 45 day identification period. Your exchange intermediary will handle the reporting for this requirement.
- Properties must be of “LIKE KIND“. This simply means income producing for income producing.
- Both the relinquished property you sell and the replacement property you buy must meet certain requirements. Both properties must be held for use in a trade or business or for investment. Property used primarily for personal use, like a primary residence or a second home or vacation home, does not qualify for like-kind exchange treatment.
- Both properties must be similar enough to qualify as “like-kind.” Like-kind property is property of the same nature, character or class. Quality or grade does not matter. Most real estate will be like-kind to other real estate. For example, real property that is improved with a residential rental house is like-kind to vacant land. One exception for real estate is that property within the United States is not like-kind to property outside of the United States. Also, improvements that are conveyed without land are not of like kind to land.
- Real property and personal property can both qualify as exchange properties under Section 1031; but real property can never be like-kind to personal property. In personal property exchanges, the rules pertaining to what qualifies as like-kind are more restrictive than the rules pertaining to real property. As an example, cars are not like-kind to trucks.
Are there restrictions for deferred and reverse exchanges?
It is important to know that taking control of cash or other proceeds before the exchange is complete may disqualify the entire transaction from like-kind exchange treatment and make ALL gain immediately taxable. If cash or other proceeds that are not like-kind property are received at the conclusion of the exchange, the transaction will still qualify as a like-kind exchange. Gain may be taxable, but only to the extent of the proceeds that are not like-kind property. One way to avoid premature receipt of cash or other proceeds is to use a qualified intermediary or other exchange facilitator to hold those proceeds until the exchange is complete. You can not act as your own facilitator. In addition, your agent (including your real estate agent or broker, investment banker or broker, accountant, attorney, employee or anyone who has worked for you in those capacities within the previous two years) can not act as your facilitator. Be careful in your selection of a qualified intermediary as there have been recent incidents of intermediaries declaring bankruptcy or otherwise being unable to meet their contractual obligations to the taxpayer. These situations have resulted in taxpayers not meeting the strict timelines set for a deferred or reverse exchange, thereby disqualifying the transaction from Section 1031 deferral of gain. The gain may be taxable in the current year while any losses the taxpayer suffered would be considered under separate code sections.
How do you compute the basis in the new property?
It is critical that you and your tax representative adjust and track basis correctly to comply with Section 1031 regulations. Gain is deferred, but not forgiven, in a like-kind exchange. You must calculate and keep track of your basis in the new property you acquired in the exchange. The basis of property acquired in a Section 1031 exchange is the basis of the property given up with some adjustments. This transfer of basis from the relinquished to the replacement property preserves the deferred gain for later recognition. A collateral effect is that the resulting depreciable basis is generally lower than what would otherwise be available if the replacement property were acquired in a taxable transaction. When the replacement property is ultimately sold (not as part of another exchange), the original deferred gain, plus any additional gain realized since the purchase of the replacement property, is subject to tax. One can also continue to reuse properties previously acquired in tax free exchanges as well. There is no limit until the proceeds are received by the person or entity that owns the property.
Beware of schemes
Taxpayers should be wary of individuals promoting improper use of like-kind exchanges. Typically they are not tax professionals. Sales pitches may encourage taxpayers to exchange non-qualifying vacation or second homes. Many promoters of like-kind exchanges refer to them as “tax-free” exchanges not “tax-deferred” exchanges. Taxpayers may also be advised to claim an exchange despite the fact that they have taken possession of cash proceeds from the sale.
ARIZONA REAL ESTATE FOR SALE
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Search for Scottsdale Arizona Real Estate For Sale, Cave Creek Arizona Homes For Sale, Carefree Arizona Homes For Sale, Rio Verde Foothills Arizona Homes For Sale, North Phoenix Arizona Homes For Sale. Access to all MLS Listings by city. Free Arizona MLS Search. Start your Real Estate Search by City NOW or Search by zip codes, 85266, 85331, 85263, 85377, 85262.
As a 35 year + full time veteran of the REAL ESTATE Industry, I understand what it takes to not only find the Home, Lot, Land, of your dreams, but also how to negotiate the minefield of real estate transactions. Not only am I a veteran of the real estate industry, I also live in the area I service.
An avid Golfer, Horseman and Baseball Fanatic, I know the pulse of the community. Todays buyer starts on the internet and spends an average of 5 months quietly perusing the information that is available. As this area tends to be buyers from outside the area my internet presence is a huge attraction. I regularly update my material and have additional pages that I maintain with up to date information on such platforms as Coldwell Banker, Google+, Facebook, Blogger, Active Rain, EProperties, Trulia, Zillow, YouTube , Tumblr and many others. Also, I have other sites that are specific to Property Types. These are:
North Scottsdale Homes For Sale By PriceDirect Link to the North Scottsdale MLS to search for homes in the specific bedroom, size or price category. You can also perform a custom search by clicking on the link to a custom search at the bottom of the column.
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Carefree Arizona |Real Estate |MLS |Realtor |Homes |SearchSearch the Carefree Arizona MLS by Bedrooms, Price or Size. Direct link to the Carefree Arizona MLS with up to the moment information. Click on any link to be directed to your search.
Carefree Arizona Subdivision |MLS |Homes |Golf Course Homes |Lots |MLSCarefree Arizona Real Estate MLS Subdivision Search. Direct Link to the Carefree MLS to search specific subdivisions in Carefree Arizona. Up to date to the moment information. Search for all Carefree Arizona Subdivision Homes For Sale.
Rio Verde Foothills Arizona Homes For Sale |Golf Course Homes |Horse PropertiesSearch Rio Verde Arizona MLS by Bedrooms, Price or Size. Direct link to the Rio Verde Arizona MLS with up to the moment information. Click on any link to be directed to your search for Homes, Lots, Land, Luxury Homes, Golf Course Homes, Horse Properties.
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- Jeff McDowell, North Scottsdale Realtor 623.262.0811 EMAIL ME
By Jeff McDowell