Re: 1031 Exchange Question - Posted by William L Exeter
Posted by William L Exeter on September 08, 2004 at 01:56:24:
First, you must be careful with your short-term holding period. The tax code, regulations and numerous court decisions are very clear that a taxpayer must have HELD the property they are selling (relinquished property) and must have the INTENT to HOLD the property they are purchasing (replacement property) for investment or use in their business. There are numerous cases where the taxpayer’s 1031 exchange was disallowed due to a short holding period because they could not clearly demonstrate their INTENT to HOLD the property.
In order to defer 100% of your capital gain taxes you must follow three (3) basic rules:
(1) Trade equal or up in value based on the sales price. If you sell property for $500K you must buy for $500K or more. I have an article on this subject that I would be happy to email to you - just email and request it.
(2) You must reinvest all of your net cash proceeds. You can pull cash out but it will triger a taxable event. And, what’s more, any cash that you pull out is allocated first to any depreciation recapture and then to capital gain taxes. You can not pull out your original investment with out creating a taxable event. In your example, if you pull the rest of the cash out ($170K) you will trigger all of your $52K in capital gain taxes and would not benefit from doing a 1031 exchange transaction.