If you are some who owns or are interested in owning property other than your primary residence, you may want to familiarize yourself with the IRS tax rules regarding the sale of real business property. In this case any property you hold, other than your primary residence is typically subject to capital gains tax. The exception to this rule is if you buy another "like kind" property of equal or greater value. This is known as the IRS 1031 Exchange. There is a lot to unpack here.
First, what property qualifies and what is a "like kind" property? Any real property that is held as a business property will qualify with some exceptions. "Flippers" who hold property for short periods of time are one exception and do not qualify. A second home may qualify, but only if you meet a minimal requirement of renting it out at least 14 days during the year for at least two years. But in general, 'like kind' means any business property in exchange for another business property. This could mean a multi-family rental home in exchange for vacant land. It could also mean farmland in exchange for a residential home that is rented, for example.
You must establish the 1031 exchange prior to close of the property you are relinquishing. At close of escrow, the proceeds from the sale of the relinquishing property goes into an account held by a 1031 Intermediary. The intermediary manages the exchange process and helps to insure the exchange rules are followed. A timeline is then established whereas the acquiring property must be identified within 45 days of close of escrow (COE) of the relinquishing property. After the 45 days, there are 180 days to complete the transaction.
If you are someone who believes you might need to take advantage of the 1031 exchange rules, it is important to remember to have the exchange set up prior to close of escrow of your relinquishing property. It is important to get professional consultation. You can contact your accountant, but getting in touch with a reputable 1031 exchange company to handle the transaction will be necessary. The exchange company will be the expert since they specialize in handling 1031 exchanges. Also, if you need advice on who to contact, ask your friendly real estate agent.
