Posted by Dave T on December 22, 1999 at 21:13:02:
Let me recap the three property identification rules to which you refer. You need to satisfy only one of the following rules to make a 1031 exchange available. Violation of ALL THREE rules makes the “exchange” fully taxable.
The Three Property Rule. The taxpayer may identify three replacement properties. If no more than three properties are properly identified within the proper time frame, then a 1031 exchange is available to the taxpayer.
The 200% Rule. If the taxpayer designates MORE THAN three properties, the total fair market value of all identified properties may not exceed 200% of the fair market value (on the date of transfer) of the relinquished property. Thus a 1031 exchange is still available to the taxpayer, even though more than three properties are identified within the proper time frame, if the aggregate fair market value does not exceed 200% of the value of the property given up.
Purchase 95% of All Identified Property. If the taxpayer purchses 95% of the fair market value of all properties originally identified, the three property and the 200% limitation rules do not apply.
Hope this clarifies the property identification issue for you. Of course, for a valid 1031 exchange, you still have to satisfy the like-kind rule and the rules for properly receiving the replacement property within the required time frame.
Question regarding avoiding capital gains tax. I am closing on a triplex (in two weeks) with approx. $35,000 in capital gains. Was wondering if there is a way to protect that cash from capital gains tax. If not, what should I do different next time?
Posted by Dave T on December 22, 1999 at 21:55:04:
If you were an owner-occupant for at least two of the last five years, a portion of your profit is excluded from capital gains taxation under the 250K/500K limitations for sale of a primary residence.
If you held the property for investment use, then a 1031 exchange would allow you to defer your capital gains.
If you held the property for investment use or your primary residence (or both) and don’t use a 1031 exchange, then an installment sale would spread out the tax on your profit over the life of the loan you give your buyer.
I did my first 1031 in 1987, and nobody knew about them then and I had to get a tax law professor involved because none of the 3 brokers or 3 lawyers involved in the transaction had ever done one. The broker of one of the largest multi-office real estate companies asked me is exchanging was legal!
I’m closing on a 2 unit in January, where I’m exchanging out of SFH that settled in Aug. I will be saving, sorry delaying paying over $13,000 in federal income tax. If your tax bill is more than $1-2k, then I would exchange. It may not be too late for you. I presume that you are selling. You have 45 to identify and 180 days (NOT 6 months) to settle on new property.
It can be any real estate (like kind) even vacant land. You must not get the proceeds at settlement even constructive proceeds. In other words a thrid party must get your proceeds to hold until the second closing. There are attorneys, escrow companies etc. that can handle all the i’s & t’s for a fee. It can be done on your own provided your read the IRS regs.
Good Luck and don’t pay anymore taxes than you have to.
Posted by DavidA. on December 22, 1999 at 18:00:40:
Hi G.C. and all,
I was just lucky enough to find this bbs yesterday and am very excited about the exchange of ideas and information.
G.C., if you are planning to buy more investment property with the gains from the sale of your duplex, look into a 1031 exchange. I am just about to sell a small apt. building and I’m going to take advantage of the IRS’s 1031 Exchange to defer the capital gains taxes. And, yes, G.C., you still can too, but the exchange has to be initiated prior to closing. Then you have 45 days to identify the replacement property or properties, and 180 to close them. Search the web for “1031 Exchanges” and you will find lots of information. The title company should also know about it and may be able to handle the exchange for you. Good luck!
Posted by DavidA. on December 22, 1999 at 20:15:21:
David,
Are you or anyone else familiar with the three different rules regarding the replacement property. One is identifying 3 then closing any one, two is the 200% rule deal, and three is the 95% rule. I’d like to be able to use 95% rule, but that seems like a somewhat “narrow window” to hit especially considering the 45/180 days requirements AND that any failure results in the complete failure of the exchange and ALL the capital gains taxes would be owed.
Your comments and opinions, as well as any one else’s will be appreciated.