If you have real property for sale, which is used in your trade or business, or is held for investment, you may be eligible to defer the capital gains tax when the property is sold by utilizing a deferred 1031 Exchange. In order to receive this tax treatment, you should contact a Qualified Intermediary, like Texas Escrow Company, a subsidiary of Republic Title of Texas, Inc., and complete the documentation necessary to create your exchange before you close the sale of your property.
The property sold needs to be real estate that you have held for investment or used in your trade or business, such as an office building or rent house. Vacation homes for your personal use, or your personal residence, do not qualify for this tax treatment. You should consult your accountant or attorney for advice on the utilization of a 1031 Exchange, especially if your accountant files your income tax return. It is important that the person filing your income tax return agrees that the exchange achieves the tax deferral you want. Your accountant can also estimate the tax payable on your sale so you can evaluate whether you want to do a 1031 Exchange. The 1031 Exchange only defers the capital gains tax (long or short term) on the sale of real property by purchasing replacement real property of an equal or greater value than the property sold.
Using exchange funds to purchase like-kind replacement real property for an investment, or use in your trade or business, and then later selling that replacement property in another 1031 Exchange to purchase other replacement property, will continue to defer the capital gains tax, plus any additional gain that might accrue by virtue of an increased value of the replacement property. In many cases, once you start exchanging real property, you need to continue using 1031 Exchanges to purchase real property if you wish to continue deferring the capital gains tax. When you sell the replacement property without using a 1031 Exchange, capital gains taxes will be due.
We suggest that you review the supplemental Definitions and Rules of a Deferred 1031 Exchange which is written in easy to understand language to familiarize yourself with some of the terms and rules, that are involved in a 1031 Exchange. All the definitions and rules of a deferred 1031 Exchange should be discussed with your tax advisor, accountant, attorney and a Qualified Intermediary before you do any exchange transaction. The rules encompass all kinds of situations and we repeat that it is imperative to consult with your tax advisors and a Qualified Intermediary about the transaction you have in mind before you sell and, in some cases, before you even contract to sell.
For more information on 1031 Exchange, please reach out to our Texas Escrow Company team:
Sr. Vice President, CES®
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