Real Estate Law – IRS Section 1031
The Internal Revenue Code has a section called Section 1031, which talks about a tax-deferred exchange, and it’s an opportunity for sellers of investment properties to defer or delay the payment of capital gains taxes that would normally be assessed to them when you sell investment properties. It defers or delays it until you acquire another property and then you sell that next property. And you can keep doing a 1031 exchange for a number of properties that you buy and sell. But there are certain requirements of it, and it’s a tax matter, but what I tell my clients is, it’s a very very beneficial way to avoid having to pay capital gains taxes, which are expensive. Capital gains taxes can be anywhere from 25-40%, depending upon what your tax bracket is and what state you’re in. New York, generally you’re talking about eight and change, 8, 8-1/2%, plus the federal rate of about 15%, so it could be 23% of capital gains tax from the profit that you make on the sale of an investment property. So by employing the 1031 exchange you get to defer that capital gains tax, but the requirements are that you identify and go to contract on another property of the same or higher value within forty-five days of your closing, and then you have to close title on that second property within 180 days. If you do that, you will be able to defer any capital gains taxes. The thing that the clients are unaware of in those situations is that they have no access to that money during the 180 days. The money is held by what’s called an intermediary company, who are licensed and regulated by the federal government, and they hold the money in a special account until you need that money to close on that second property. And if you follow those requirements, then you’re able to defer having to pay a sizable amount of capital gains taxes upon the sale of your investment property.