- Our Listings
- Area Info
- My Associates
Sedona's Finest Properties Since 1993
Cell: 928.821.1442Email Bruce
If you are a current Sedona real estate owner of investment property you owe it to yourself as a savvy investor to become acquainted with the financial benefits of 1031 tax-deferred exchanges, as viable in 2015 as they were over 90 years ago.
1031 tax-deferred exchanges are “shelter” vehicles offered by the IRS. They allow the investor freedom from state and federal taxation on real estate profits if the money is rolled over into the purchase of other “like kind” property. By immediately reinvesting, the government views the transaction as “a continuity of investment” thereby allaying taxation on capital gains earned by the sale of the relinquished property.
Originally, tax-deferred exchanges were first made available by the 1921, but they were difficult and risky. In 1991, the IRS changed the regulations to make it even easier to exchange properties. Article 1031 under the current tax code allows for the deferment of capital gains tax if the individual purchases other “like kind” property within a definitive amount of time. “Like kind” includes property for rental, business and commercial purposes, apartment buildings and undeveloped land intended for investment. For example, a property owner can exchange a single-family rental property or condominium in Texas for land or a commercial building Arizona. Exchanging property instead of selling for cash allows owners to diversify or consolidate their holdings, reduce management commitment or improve their cash flow. The advantages to the real estate investor are substantial.
The tax deferred exchange strategy allows the investor to defer payment of capital gains taxes on an investment property by placing proceeds of a sale with an intermediary. Money otherwise earmarked for Uncle Sam now goes directly to work for you. The funds are temporarily held until a replacement property is identified. The funds are then reinvested within a specific time frame, in a like-kind property or properties of equal or greater value.
There are several types of 1031 Exchanges. The most popular is the Delayed Exchange. This is the perfect exchange program for when the investor sells the first property before finding a second property. The clock starts ticking when the first property is sold, and the investor has 45 days from that point to identify the second investment for exchange and 180 days from sale of the first property to complete the transaction.
The Reverse Exchange works when a replacement property is purchased before the first property is sold. Some intermediary companies will actually purchase the property and hold it if the first property is not sold in the allotted time. There is also what’s called an Improvement Exchange, which allows the investor to acquire a property, make improvements, and then make the replacement with the improved property and the simultaneous exchange, which is a back-to-back sale.
Make sure that you use a knowledgeable intermediary if you’re going to participate in a 1031 Tax-Deferred Exchange for your Sedona investment property sale. A qualified intermediary offers a “Safe Harbor” for the exchange to take place and will be aware of the rules and qualifications of this strategy. Ask your favorite title company for a referral for a qualified intermediary. Happy Selling!