Best Financial Advisors in Freehold, NJ

1031 Like-Kind Exchange-Tax Deferral-Rental Property nIn the past year I have been getting a lot of questions from clients about selling their rental property, and if there any way to defer on paying tax on the capital gain that occurs from the sale, specially it is a selling market now due to the COVID-19 pandemic situation that we currently have now and real estate market is in a rise.nFirst, let explain what is the Like-Kind Exchange, what property qualifies for the Like-Kind Exchange, and how Like-Kind Exchange works.nA like-kind exchange is used when someone wants to sell an asset and acquire a similar one while avoiding the capital gains tax. Real property qualifies for Like-Kind Exchange, real property is business or investment properties that is used in the regular course of business, for example, rental properties.nHow does that work, and how we can take an advantage to defer taxes to the future and not to pay now, when a commercial property or investment property is sold for a gain either short term a sale within one year, or long-term gain a sale more than one year, it is required to pay a capital gains tax on the profit earned. Capital gain rate falls between 10% to 37% for profits made on a sale within one year or the long-term rate which falls between 10% to 20% for profits made on a sale after one year of the initial purchase date.nnRules of 1031 Like-Kind Exchange:nn• Since most 1031 exchanges do not occur as a simultaneous exchange, you will have to hire a qualified intermediary (QI) to handle the process for you. I saw clients come after the fact of selling their investment property ask about how to defer on capital gain tax, and the first question that I ask did you hire an intermediary to hold the fund and usually the answer is no and they pay tax of the net gain.nn• The intermediary will:no acquire the property from you and transfer it to the buyerno Hold the property sales funds until replacement property is identified (will explain below)no Acquire the replacement property from the seller no Transfer the replacement property to youno Lastly go to your accountant and he/she will be able to file your tax return and fill up the necessary forms for tax deferral.nn• Since finding a Like-Kind property can take time, the IRS set up rules and they are explained below:no 3-property Rule: This rule simply states that the purchaser identifies three properties they would be willing to purchase under the exchange. From these three properties, they can purchase any or all with the monetary gains from the primary investment property sale.no 200% Rule: This rule allows the purchaser to identify any number of properties with a total value no more than twice the primary property value.no 95% rule: The purchaser identifies as many replacement properties as they are interested in but agree that before the end of the 45-day exchange period, they will acquire a replacement property that is 95% or greater of the aggregate fair market value for all the identified properties.nn1031 Exchange Deadline Calculatorn• 45 Day Deadline: You must identify your potential like-kind replacement properties to your qualified intermediary no later than midnight of the 45th calendar day following the close of the relinquished property sale transaction.n• 180 Day Deadline: You must complete your 1031 Exchange transaction, which includes the conveyance of title to all of your like-kind replacement properties that you intend to acquire, no later than the earlier of:no Midnight of the 180th calendar day following the close of the relinquished property sale transaction, orno The due date of your Federal income tax return for the tax year in which the relinquished property was sold, including any extensions of time to file.