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The tax deferred sale and purchase of like-kind properties for the benefit of deferred gain treatment.
Cash or mortgage relief received in exchange, resulting in a taxable gain.
-The transfer of title of real property in a real estate transaction.
-The cash and/or other property available at the time of closing on the sale of the relinquished property.
-The 180-day period beginning on the day property is relinquished,, closed and sold, and ending at midnight on the 180th day in which replacement property must be acquired.
-The 45-day period beginning on the day the property is relinquished in which the replacement property must be identified.
-The status when an investor has closed escrow on the relinquished property and is in the 45-day identification period of the 1031 exchange process.
A Qualified Intermediary holds the money from the relinquished property’s sale while it is waiting to be reinvested into the replacement property.
Like-kind is defined in the tax code as meaning “similar in nature or character, notwithstanding differences in quality or grade”. A person must re-invest the proceeds into a “like-kind” replacement property; that is why it is called an exchange. This does not mean that one can only exchange a rental home for another rental home, or an office building for another office building. “Like-kind” simply means that both properties have to be for investment or for productive use in business or trade. So while that would generally rule out a primary residence, a wide variety of other properties could qualify, including office buildings, apartments, retail, land, and properties that involve oil, gas, and mineral investment opportunities.
Another requirement is that the investor use a “qualified intermediary”. A qualified intermediary (QI) hold proceeds of sale for the benefit of the buyer and seller, or acts as an escrow agent or trust fund holder. A QI is adisinterested third party who holds the funds from the relinquished property, and then releases the funds for the replacement property acquisition. Although the Treasury Regulations use the term “Qualified Intermediary”, some companies use the term “facilitator” or “accommodator”. The QI will deposit the sale proceeds into his/her escrow or trust account and distribute the proceeds to the seller of the new property, assure that all documents are in order for the exchange. Qualified Intermediaries are not regulated or licensed, so it is important to work with one who has fidelity bonds, errors and omissions insurance and who is very knowledgeable in this area. Many times the Qualified Intermediary is providing technical assistance to make sure that everything goes right, although they specifically will not offer legal or tax advice.
Investment property sold as part of an exchange.
Investment property acquired as part of an exchange.
Section 1031 of the IRS Code
The authorizing section of the IRS tax code that allows an investment property owner to defer capital gains.
An exchange must identify the replacement property within forty-five days and close on it within 180 days. The clock starts ticking as soon as the relinquished property is sold. see definitions above.
Triple Net Lease, NNN
A triple net lease requires the tenant to pay the taxes, maintainance, and insurance. From the investors point of view it means that the investor has no responsibility for the expenses subject to the investors responsibility of ownership. There is also the risk of tenant default.
An investor must buy a property of equal or greater value. To defer all of the capital gains tax, a real estate owner is required to reinvest all of the equity in the replacement property and acquire equal or greater debt.
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