1031 Exchanges - Selling That Property in Myrtle Beach
Tax laws changed several years ago to allow a seller to keep up to $250K in capital gains if he sold his primary residence. A couple was allowed $500K.
But selling a rental property doesn’t afford those exclusions, and if you are lucky enough to MAKE any profit in selling investment or vacation real estate in this day and time, you may end up losing more than equity.
The “Infernal Revenue” people have a code section 1031 that can help real estate investors to at least prolong the agony of paying capital gains taxes when selling property other than your own home.
Called a 1031 Exchange, a “tax deferred exchange” or sometimes a “Starkers Exchange”, the code is a bit complicated, strict, and important for everyone that owns real estate to know about.
If you sell property that is considered investment property, and you make more than what you paid for it, the amount of profit you make is subject to Capital Gains taxes, anywhere from 10% to 39.6%, depending on your income…
The way to avoid paying Capital Gains tax (really only deferring it until you actually do liquidate) is to buy another property equal to the first, known as a “like kind” property. It has to be the same kind of property – you can’t exchange your vacation home for a motorhome. That beach condo can be traded for a house or a lot, but not a double-wide. And the replacement property has to be worth as much, COST as much, and be mortgaged for as much…or more. Any cash you receive from the transaction is called “boot” and will be taxed.
Interestingly, you can do a 1031 exchange on anything…it doesn’t have to be real estate, just like-kind property. If you buy a cow for $500 and sell it for $1000, you can buy another cow for $1000, or maybe a bull, and put off paying capital gains tax on the first cow. But with cows or real estate, here are the other requirements:
From the day the sale closes, you have 45 days to identify the new property you are buying to the government. You also have only 180 days to close on the second one. Some investors delay the sale closing with extended escrow periods to give themselves time to find a second one. But your buyer might not appreciate that long escrow if he’s under the gun too.
That’s where an “exchange facilitator” or “qualified intermediary” comes into play. One of the tightest restrictions in a 1031 transaction is that you, as a seller, cannot touch or even have the ability to touch the proceeds of the first sale. You can’t put the money in a bank account. You can’t give it to your mother-in-law to hold, either.
But you can assign your selling rights to a professional 1031 intermediary to handle, and many of them can actually find your “like kind” property as well. These 1031 companies work from both sides, having the best investment property investigated and lined up waiting on the 1031 customer who needs them. They may also offer a “Tenant in Common” option where several investors purchase property together using their expertise.
Since the facilitator or Qualified Intermediary actually has control of your funds, you need to be sure they are bonded and experienced. If you go the one step further and use them to choose your next property, this is even more important. Check references, verify experience, and enjoy the money you put off giving up for taxes.
When it comes to Myrtle Beach real estate, the JoinMyrtleBeach.com is your best source.