Those that have been involved with real estate for a period of time love the tax deferred exchange.
As of January 1, 2013 the capital gains tax rates have increased 58%. Yes, 58%! The more you know about it, the more that you can structure these things to the advantage of your client, the better off you’re going to be. There are five rules to follow to qualify for a tax deferred exchange:
- Number one: The property that I own and the property that I acquire through the exchange have to both qualify as like kind property. If it’s an investment property or one held for business purposes, that qualifies.
- Number two: I have to exchange even or up in both value. I have to acquire a property of equal or greater value of that which I sold and I have to use all of the funds that came out of that sale to go into the acquisition of the replacement property.
- Number three: I have to use an exchange facilitator in order to complete the tax deferred exchange that leads to safe harbor.
- Number four: I have a limited period of time, I’ve got 45 days from the sale of my relinquished property to identify a limited number of properties that would be potentially acceptable as replacement properties.
- I can either identify 3 of any value; no limitation on value but there’s a limitation on the number of properties I can acquire.
- The second option I can acquire as many as I would like as long as the composite value of those which I acquire doesn’t exceed 200% of that which I sold.
- Number five: My last rule is I’ve got another 135 days behind that to close the transaction; identify in the first 45, close in the remaining 135 days.
If I’ve done that, I should have qualified for a tax deferred exchange. Certainly you want to consult your CPA prior to entering into this. Make sure that you have your ducks in line. Once the transaction has closed, there’s no such thing as “un-closing” it and doing it properly.