1031 Tax Deferred Exchange
Las Vegas 1031 Exchange
So you bought a nice little rental property back in 1987 and the house has appreciated very nicely over the years. Trouble is... everyone is talking about the real estate "bubble" and it looks like prices may plummet in Pasadena. If you sell this little gem today chances are that you will walk away with a tidy profit, or will you? Uncle Sam can't wait. Your profit will be subject to Capital Gains Tax and that's not a good thing. The other consideration is; what to do with the scraps that the IRS leaves you. Maybe you could buy another income property located in an area where prices are poised to rise rather than fall... a place like Las Vegas, for example. There's a better way to do this. Thanks to a provision in the Internal Revenue Code, you can sell a Burbank beauty and buy a "like-kind" property without paying Capital Gains Tax. "How do I do that, Jim," you ask.
First, let's make sure we are talking about "like-kind" property. Like kind refers to the "use" of the property, not to its quality. You will not qualify if you are exchanging your personal residence for a rental duplex. By the way, both properties must be within the USA and its territories.
In our little scenario chances are that the California home will sell for much more than a similar Nevada home. In this case, why not buy two Nevada homes? As long as they will both be used as rental properties, no problem.
Nuts & Bolts
The first thing to do is to talk with your tax advisor to determine the tax consequences of an exchange. Then contact a realtor who is familiar with exchanges and arrange to list your property. Make sure that the escrow company is aware that this will be a 1031 exchange transaction. Most national escrow companies have "qualified intermediaries" on staff who can handle the details.
From the time you sell your present property you have:
If you haven't already done so, this would be a good time to contact your Las Vegas realtor and arrange to shop for a replacement property. It is extremely important that your Vegas agent include clauses in a purchase contract assuring that the Vegas seller will cooperate in a 1031 exchange (at no additional cost to the seller).
Any gain that results from an exchange, whether cash, debt reduction or anything of value such as appliances, is called "boot" and will be taxable, so a general rule of thumb is to never trade down. In other words, always exchange for property of equal or greater value, to avoid paying capital gains tax.
The 45-day Rule
To qualify under the 1031 exchange rules, you must close on the replacement property or identify the property within 45 days from the sale of the exchanged property. To identify possible properties, you must deliver a list of potential homes (complete addresses) in writing to the exchanger. The list can fall under the following rules:
In a market such as Las Vegas where real estate sells quickly, it is quite possible that your "identified" properties may sell before you actually get to the purchase phase. For that reason, I would suggest that you attempt to get purchase contracts signed within the 45-day period. If you've identified homes that have subsequently sold, your entire 1031 exchange will be disallowed.
I'm experienced with 1031 exchanges
For over a decade I've helped investors with their 1031 exchanges. Please feel free to contact me anytime to discuss your exchange options.