In the case of a property sale, the owner will typically be taxed according to recognized gains acquired through the sale. There is a section in the Internal Revenue Code, however, referred to as Section 1031, which permits taxes to be deferred until some time in the future. This is called a tax-deferred exchange.
How Does a Tax-Deferred Exchange Work?
With tax-deferred exchanges in Davenport, IA, the original owner, known as the taxpayer, uses the funds from the sale of the relinquished property to purchase a replacement property, typically of equal value to the relinquished property or greater, which enables the owner to defer taxes on those gains. Any funds remaining in a purchase of less than equal value, however, will be subject to taxation.
How Does the Process Work?
There are typically four participating parties in tax-deferred exchanges in Davenport, IA. These are the taxpayer, the buyer of the relinquished property, the seller of the replacement property and a QI, or qualified intermediary.
The taxpayer releases the relinquished property to its buyer, who pays the QI in cash. The QI pays the seller of the replacement property who will transfer the title for the new property to the taxpayer.
Exchange qualification depends on certain requirements and conditions:
- Most exchanges are based on real estate.
- All properties cannot be for residence or resale but must be for investment or commercial purposes.
- All properties must be of like-kind.
- When exchanges aren’t simultaneous, the tax payer is obligated to identify a new property replacement within 45 days and acquire it either within 180 days or by their federal tax return due date.
Reverse exchanges are also an option when the replacement property has to close before the sale of the original property. This process depends on a fifth participant known as an exchange accommodation titleholder, or EAT. This intermediary will hold the title to the replacement property until the sale on the relinquished property closes.
IRC 1031 exchanges can tend to be complicated and confusing and can even pose the potential for tax liabilities. For this reason, it’s best to contact an experienced QI that will ensure a legal and profitable exchange.