| Q.: |
Do I need an accommodator if my sale and purchase happen at the same time? |
| A.: |
In
most cases, yes.
If you personally direct the transfer of
funds from your sale escrow to your purchase
escrow, this is not an exchange. You will be
taxed on the gain.
Concurrent exchanges without an
accommodator are possible, but very complicated.
They generally require that the buyer of
your relinquished property purchase your
replacement property, and then exchange with
you.
It is best to use an accommodator and
complete a delayed exchange.
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| Q.: |
Can I purchase more than one property as my
replacement?
|
| A.: |
Yes,
you may purchase more than one property as long
as they are “like-kind” and properly
identified. All properties must be received
within the same 180-day exchange
period.
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|
| Q.: |
If
I enter an agreement to exchange, can I withdraw
before completing the exchange? |
| A.: |
Yes,
you can, but you will be taxed on the
gains. There is, however, a waiting
period before funds are available. |
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|
| Q.: |
Can
I exchange from one property into another
property that I already own? |
| A.: |
No, this is not
allowed by the IRS. |
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|
| Q.: |
How
similar does the replacement property need to be
to the sale relinquished property? |
| A.: |
The
IRS guidelines state that the replacement
property must be located within the USA and
"held for
investment or held for productive use in a trade or business." Many people chose
to exchange passive investments, such as vacant land, into active
income-producing investments, or vice-versa. Possibilities are numerous. |
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|
| Q.: |
If
I lived in the property before I rented it out,
is there some kind of exemption from paying
capital gains taxes? |
| A.: |
Yes,
you may qualify for an income exclusion of up to
$500,000.00 on this gain as long as you lived in
the house for 2 of the last 5 years before the
sale. Please review the
IRS publication regarding Excluding the Gain
to verify if you qualify. If you do qualify for
the principal residence exclusion, you do not
need to do a Section 1031 exchange. |
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|
| Q.: |
If
I do not exchange properties, how much will I pay in taxes? |
| A.: |
Your capital gains tax burden is
calculated by subtracting the adjusted
basis of the property from the adjusted sales price of the property and
multiplying this amount by the applicable tax rates. In addition, you may
be required to pay state income tax and a percentage of the depreciation you
have taken on the property since you bought it. For a basic reference,
visit our Example page |
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|
| Q.: |
How
is the Section 1031 Exchange reported on my Tax
Return? |
| A.: |
The exchange is
reported on Form 8824. Follow this link for a
downloadable version of this form 2004
Form 8824 Like-Kind Exchanges ( 35K) Adobe
PDF |
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|
| Q.: |
If
I exchange into a property, can I later move
into it? |
| A.: |
There
are no set guidelines as to how long your
replacement property must be held as an
investment property before you can occupy it as
a primary residence. A two-year holding period
is considered a "safe harbor". If you
exchange into a property, you must now own it
for five years and live in it for two years
before you can sell it as your primary
residence. |
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|
| Q.: |
Can
I take some money through the exchange? |
| A.: |
Once
the money is deposited into an exchange account,
funds can only be withdrawn in accordance with
the IRS regulations. The taxpayer cannot receive
any money until the exchange is complete. If you
want to receive a portion of the proceeds in
cash, this must be done through escrow before
the funds are deposited with the Qualified
Intermediary. |
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|
| Q.: |
Didn’t
the Government just reduce the Capital Gains Tax
rate?
|
| A.: |
As
of May 5, 2003, the long-term capital gains tax
rate was reduced from 20% to 15%. If you
do not exchange properties, you still pay the
following: 1) Capital Gains Tax at 15%, 2) State
taxes of about 9.5%, and 3) Depreciation
recapture at 25% of all depreciation taken since
you purchased the property. If you
exchanged into the relinquished property, your
tax liability is based on the gain from the
current sale plus the gain on previous
transactions in the chain of exchanges.
Check with your tax advisor to verify the tax
consequences of not exchanging.
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|
| Q.: |
How
is
California
Withholding treated in a 1031 Exchanges?
|
| A.: |
All
non-owner occupied real estate sold in
California
is subject to State income tax withholding.
Your escrow company withholds 3 1/3% of
the sale price, and sends it to the State as
prepayment of State income taxes due on the
sale.
There is no withholding requirement when
you complete a Section 1031 Exchange and spend
all of your exchange proceeds.
If you have exchange proceeds remaining
after the sale, the accommodator sends 3 1/3% of
these funds to the State.
If you cancel your exchange after the
accommodator receives your exchange proceeds,
the accommodator then sends 3 1/3% of the full
sale price to the State prior to releasing any
funds to you.
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