Around 15 to 30 percent of tax can be taken out on your capital gains. Don’t you think this is a great deal of money already? It sure is. Any investor can do so much with this amount, simply by trading it or re-investing it.
What if as an investor, you get a chance to defer the payment of capital gains tax. Will you grab it? Definitely, you should. Being able to defer payment of tax provides great opportunities for you. How do you do this? Simply by using the 1031 of the IRS code.
What is this all about?
Section 1031 of the IRS code was operated under the theory that in any exchange transaction nothing is realized as gain or loss. However, to satisfy this theory, there are certain conditions to be met.
In the real sense, 1031 is the like kind exchange of investment or trade properties. In here capital gains tax (CGT) is deferred and will be paid on a later date. If you look at the definition, you will encounter terms as “like kind”, “investment or trade properties” and “deferred payment of CGT”. To understand them better, here is a simple discussion of the terms:
1. Like kind describes the qualified property used in exchange. They should have similar nature, class and character as the original property relinquished. Moreover, its location should be within United States. In selecting them, the taxpayer should satisfy the following rules:
• Three property Rule
• 200 Percent Rule
• 95 Percent Rule
2. Investment or Trade properties are relinquished properties to qualify for the exchange. This could be anything like buildings used for business, duplex homes used for rentals and offices.
3. Deferred payment of CGT means that the sell and buy transaction (that is performed to obtain the exchange property) is not tax-free. The amount of the exchange would still be filed using a form 8824 of the IRS.
Step by Step Process
Before the exchange is executed, several parties will be involved in the transaction. They are the taxpayer, the buyer, the escrow agent, qualified intermediary and the seller. As to the process, here’s how it goes:
1. The taxpayer must contract the qualified intermediary to engage in a 1031 exchange agreement upon the execution of the purchase contract.
2. Upon sale of the qualified property (owned by the taxpayer), the funds will be held by the escrow agent. After the sale is closed, the funds will then be given to the qualified intermediary.
3. Within 45 days upon sale, the taxpayer should have already sent a document stating the three possible properties for replacement (but will vary depending on the value).
4. The qualified intermediary will then purchase the like-kind property and give it to the taxpayer within 180 days from the first sale.
5. When all is received by the taxpayer, he or she can now file for 1031 using the 8824 of the IRS.
As you have noticed, “45 days” and “180 days” are mentioned on the steps. It is important for the taxpayer to meet these conditions or else the exchange will be invalidated.
Do you want the best Arizona real properties? Check these sites
Chandler AZ Acreage Real Estate,
Short Sale Real Estate in Chandler AZ and
New Real Estate in Chandler AZ.
