You may be able to defer capital gains tax on the sale of property which has appreciated in value through the use of a Section 1031 like kind exchange. It is a vehicle which can be employed by a taxpayer who sells property which has been held for productive use in a trade or business or for investment, if certain strict guidelines are followed.
Let’s use the sale of a duplex which has been used as rental property and has appreciated in value as an example. To defer capital gains taxation, prior to closing on the duplex the taxpayer/owner would enter into an Exchange Agreement with a Qualified Intermediary (“QI”). The taxpayer/owner would assign its rights in the purchase and sale contract for the duplex to the QI. The QI would participate in the closing on the duplex, and receive the proceeds of sale. It is important that the seller of the duplex (relinquished property) does not receive the proceeds of sale actually or constructively.
After the closing on the relinquished property (duplex), the taxpayer has 45 days to identify replacement property. While there are exceptions, the taxpayer may identify up to three replacement properties. When real estate is involved in a 1031 exchange the like kind requirements are quite liberal. Examples of replacement property which can be exchanged into with the proceeds of the sale of the duplex include other residential rental property, a farm, undeveloped land, or commercial property.
You must close on the replacement property within 180 days of the closing on the duplex. The 45 day and 180 day deadlines are hard deadlines. After the contract to purchase the replacement property has been assigned to the QI, the QI would participate in the closing on the replacement property, using the funds in the Exchange Account to purchase the replacement property for the taxpayer.
Our firm owns K & S General Exchange, LLC which acts as Qualified Intermediary in 1031 exchanges. Unfortunately, we are prohibited from acting as Qualified Intermediary for any client we have represented in the last 24 months.
A 1031 like kind exchange might work for you. It requires planning with your tax advisor and coordination with a Qualified Intermediary. Feel free to contact us if you have interest in a 1031 like kind exchange.