Life changes, sometimes quickly. Older people may have an illness or decide to retire. When it’s time to make a life change such as retirement, you may want to sell some business or investment property. As you prepare to sell that property, you should be aware of a provision of the Internal Revenue Service tax code that allows you to defer your capital gains tax.
Under the 1031 exchange, capital gains taxes can be deferred if a property used for business or investment is sold and the money is reinvested through the purchase of a like-kind property. Like-kind properties are of the same nature or character, according to the tax code.
The 1031 exchange is a provision of Section 1031 of the IRS tax code, which mandates that:
- The 1031 exchange must be done within 180 days. The property must be identified in 45 days and the buyer must make a choice in 90 days. The closing must be held within 90 days.
- A qualified intermediary – an independent third party – must handle the proceeds of the sale. The owner is not allowed to be involved with the transfer of the money.
A property that was purchased for $100,000 and is now valued at $500,000, for example, could be sold and the money rolled into a like-kind property selling for $1 million to delay payment of capital gains taxes. You don’t have to buy a larger building to qualify for the 1031 exchange, however. The money also could be reinvested in a smaller property.
If you don’t reinvest all the proceeds of the sale, you can defer part of the capital gains tax through a partial 1031 exchange.
Sometimes our clients want to simplify their holdings. One family, for example, decided it was time to sell a multifamily building. They sold the apartment building and reinvested the proceeds in a single-family residence on Martha’s Vineyard.
Many of our clients are making life changes, often after ages 65 or 70, or even older.
But the 1031 tax exchange doesn’t just apply to individuals – an LLC or trust also can defer taxes under the law. At NAI Glickman Kovago & Jacobs, we make sure our clients are aware of all the options available to them in commercial real estate sales and purchases. We are happy to explain the 1031 exchange provision to clients who qualify for the tax deferral and advise them on the critical details they need to know.