1031
Tax Deferred Exchanges in Manhattan Beach
The
1031 Tax Deferred Exchange is one of the last tax shelters
allowed by the Internal Revenue Service. It is a transaction in
which a taxpayer exchanges investment property for like- kind
investment property, and defers the payment of capital gain taxes.
The IRS defines like-kind property as all real property held for
investment purposes, or the productive use in a trade or business.
This basicallyincludes any real estate held for investment except
your primary residence and second family home.
See
Also Types
of 1031 Tax Deferred Exchanges
There
are some important rules which must be followed to effectuate
a valid exchange:
- The
exchange must be opened before the close of
Escrow on the relinquished (sale) property.
- The
taxpayer must identify the replacement (acquired)
property within 45 days after the close of the
relinquished(sale)property.
- The
taxpayer must close Escrow on the replacement
property within 180 days from the close of the
relinquished property, or, before the date the tax
return filing is due for the tax year in which the
relinquished property was transferred - whichever
comes first.
- The
taxpayer must reinvest all net proceeds into the
replacement property.
- The
taxpayer must obtain a debt of equal or greater
amounton the replacement property.
By
following these rules, the taxpayer shelters capital gains tax
into the replacement property,and defers the recapture of depreciation
tax. This creates more buying power for the taxpayer than if the
capital gains tax was paid. Also, by deferring the payment of
capital gains tax, the taxpayer gets to invest the taxes into
the replacement property interest free from the IRS. The 1031
Tax Deferred Exchange also avoids the California Withholding Tax.
