What is you could sell you Orange Beach/Gulf Shores investment property and instead of paying taxes, have the use of all your equity for a new investment? YOU CAN!
The Internal Revenue Code, Section 1031 allows an owner of investment property to exchange property and defer paying federal and state capital gain taxes if the owner purchases a “like-kind” replacement property. With the advantages of leverage, every dollar saved in taxes allows and investor to purchase three to four times more real estate.
Basic requirements
In 1991 the IRS provided parameters on how to convert a sale and subsequent purchase of property into a tax-deferred exchange by employing a “Qualified Intermediary”.
Requirement #1: Both the sale (relinquished) property and the purchase (replacement property must be held for investment or used in a business. This can include rental houses, commercial property, land and the rental portion of an owner-occupied multi-family. Properties which are not “like-kind” are an investor’s primary residence or property “held primarily for sale”.
Requirement #2: The IRS requires an investor to identify the replacement property(s) within 45 days from closing on the sale of the relinquished property. The 45-day identification period begins on the relinquished property closing date.
Requirement #3: The investor must close on the replacement property(s) 180 calendar days after closing on the sale of the relinquished property, or the due date for filling the tax return for the year in which the relinquished property was sold, whichever is earlier.
Requirement #4: The “Qualified Intermediary” actually documents the exchange by preparing the necessary paperwork (Exchange Agreements, Assignments, etc.) and holds proceeds on behalf of the investor. A tax deferred exchange needs to be set up prior to closing on either property.
Many Orange Beach/Gulf Shores, Alabama investors are combining the tax deferral benefits of an exchange with the tax exclusion advantages available under the primary residence tax rules. Exchanging into a replacement property that is initially “held for investment”, and at a later time converting this rental property into a primary residence, enables a property owner to obtain tax-free funds. Under the primary residence tax rules, anyone living in a property as their primary residence for 24 months out of a 60-month period is eligible to keep $250,000 tax-free is filing single and $500,000 if filing jointly. An additional requirement is that an investor exchanging into a rental house, which is later converted to a principal residence, will have to wait a minimum of five years to exclude capital gain under the primary residence tax rules.
