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1031 exchange
Section 1031 defers capital Section 1031 defers capital gains taxes essentially by shifting tax basis from a property sold to an acquired property of “like kind.” For the purpose of Section 1031, the IRS treats any sort of real estate held for investment purposes as being of like kind to any other investment real estate.
A Vacation home held for personal use does not qualify. But a vacation-home rental property does. But it can't be utilized for personal use more than 14 days a year, or ten percent of annual rented days. A minum of two years of rental history is advisable, preferably five years.
All exchange transfers and money must be handled through a disinterested, independent party, known as a "qualifying intermediary" or QI. Property to be acquired by the taxpayer must be identified within 45 days of the transfer of the property being sold in the exchange. The entire transaction must be completed within 180 days.
Section 1031 exchange is also useful as an estate-planning tool. Property acquired through an exchange can held or exchanged again, any number of times. Then at death, the property gets a step-up in basis and heirs can sell tax-free.
Section 121 Capital Gains Exclusion
Once a home has been a principal residence for two years out of the previous five, the owner qualifies for Section 121 capital gains exclusion of up to $250,000, if single, or $500,000, if married and filing jointly.
Application of the 1031 Exchange and the 121 Exclusion
For example, if you lived in a house in say, Boca Raton, for three years, then rented for two years, you can sell it as principle residence and take the Section 121 exclusion and do a Section 1031 exchange on anything above that.
This is a tremendous tax and financial planning opportunity that many homeowners should take advantage of. However, homeowners should only structure these transactions after consulting with competent tax, legal and financial advisors.
For like-kind exchange real estate investment opportunities in South Florida, please contact us today.
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