Tax Free Exchange Requirements
Tax Free Exchange Requirement
To fully defer all capital gains taxes, all
tax free exchanges must meet four separate requirements:
First, 100% of all proceeds from the sale of the first investment property must be reinvested into the second, replacement investment property.
Second, the amount of equity ( investment property value minus loan value) of the replacement investment property must be equal to or greater than that of the relinquished investment property.
Third Tax Free Exchange Requirement: The property owner mustn’t have constructive receipt of the sale proceeds during the exchange period or else all funds become taxable income. Typically, this is accomplished using a professional exchange facilitator to hold sale proceeds and execute the exchange documents.
Fourth Tax Free Exchange Requirement: Both relinquished and replacement investment property must be like-kind. As used in IRC 1031(a), the words Like-Kind have reference to the nature or character of the investment property and not to its grade or quality. One kind of class of investment property may not, under that section, be exchanged for investment property of a different kind or class.
Contact us today to be put in touch with a qualified tax free advisor for your next tax free exchange.