There can be a substantial amount of capital gains tax due upon the sale of an investment property in Denver, both the IRS and the State of Colorado. Often an investor will use a 1031 exchange as a tool to defer those taxes. Read on…
The cartoon character Wimpy would say that he’d gladly repay you Tuesday for a hamburger today. Some real estate investors say a similar thing to Uncle Sam to be able to hold on to their proceeds from the sale of an investment and agree to pay the tax later.
The benefit of a 1031 exchange is that it allows the investor to defer the tax due from the sale into the replacement property. This allows more money to be reinvested. In the example shown, the investor has 27% more to invest now by deferring the tax into the future.
The property to be exchanged must be like-kind which means real estate for real estate. Rental property can be exchanged for other rental or investment property. Personal-use properties like a first or second home are not eligible for exchanges.
There are some critical dates that restrict the validity of the exchange. The investor must identify the replacement property within 45 days of the sale of the relinquished property. The replacement property must be closed within 180 days of the sale of the relinquished property.
- The replacement property must be equal to or greater in value, equity and debt than the one being relinquished.
- All net proceeds must be used in acquiring the replacement property.
There are specific rules involved in constructing a valid tax-deferred exchange. There are three professionals that should be involved: a tax advisor, a real estate professional and a qualified intermediary who will assist in the acquisition and transfer of both the relinquished property and the replacement property. Additional information can be found in IRS Publication 544.
If you would like to talk about moving your Denver real estate holdings into something closer to home, or closer to where you intend to retire, lets talk about using the 1031 exchange as a legal, and very cost effective way of doing it. There are some tricks and having a good Realtor lined up in the destination city is critical to the smooth running of the exchange. And it does not cost a buyer anything to participate in the exchange. We can get the first leg started here in Denver for you. Give me a call…or visit www.DenverRelocation.com.