Capital Gains Tax on Selling Investment Property


HOW TO ELIMINATE CAPITAL GAINS TAXES WHEN SELLING INVESTMENT PROPERTY UNDER SECTION 1031 OF THE IRC CODE

If you sell a property and correctly reinvest the proceeds in a new purchase of equal or greater value, you don’t have to pay any tax at this time. Both the property you start with and the one(s) you end up with must be for your business or investment. Both must be the same kind or "Like Kind" of property. The 1031 technique doesn’t apply to inventory or dealer property (like a builder or developer). You have to "identify" the property(ies) you want to acquire by the 45th day after you closed on the property you sold. And, you must close on the new property(ies) within 180 days of the initial sale.

  • The Strategy. By using section 1031 of the IRC Code, you sell your existing investment property, you follow the prescribed rules for handling the sale proceeds and then you reinvest these proceeds in a new purchase(s) of an equal or greater value. This technique will not trigger any gain for tax purposes. Any tax is postponed.
  • Who is Eligible for a 1031? Anyone owning an investment real estate property, who has a nice appreciation they wish to "lock in" by selling, and/or who sees better opportunities elsewhere, but who is "paralyzed" for fear of the taxes they will have to pay. There are more exchange opportunities than you may think! Remember: "EVERY SALE THAT IS NOT A SALE OF YOUR PERSONAL RESIDENCE, IS A POTENTIAL EXCHANGE!"
  • The "KEY" to a Delayed Exchange. A "middle-man" or accommodator who is the "Qualified Intermediary" under the Code holds your proceeds from the initial sale in a Special Trust Account until the replacement property(ies) can be found and closed. Proper use of a "Qualified Intermediary" is an IRS officially sanctioned "Safe Harbor" and therefore is the only safe way to do an Exchange.
  • A Completely Tax-Deferred Exchange Must Meet Three Criteria. (1) The replacement property (new acquisition) must have a value to, or greater than, the transferred property. (Net purchase price vs. Net selling price.) It is not enough that the equity be equal or greater. (2) You must use all of the proceeds money from the transferred property to acquire the replacement property. (3) You must not have "debt relief". If a mortgage is "retired" with the sale of the transferred property, then a mortgage of an equal or greater amount must be placed on the acquired property. If it is less, this is called "debt relief", the IRS considers this to be canceled or offset if you put new (fresh) cash into the purchase of an amount at least equal to the "debt relief".

This article was authored by Lauren B. Cohen, a member of the New Jersey Bar and qualified intermediary, with a law office in Paramus, New Jersey, 175 Farview Avenue, Telephone:(201)261-2448