Time To Use A Florida 1031 Exchange
For those who are thinking about investing in real estate in Florida, it is not superfluous to familiarize themselves with the rules of a 1031 tax-deferred exchange , which allows you as the property owner to sell your properties and acquire the other properties while "deferring" federal capital gains taxes.
Historically, this exchange is called a Starker Exchange. In 1979, the court in the case of Starker v. the United States ruled that the exchange of real estate for a certain period of time is legally considered the same as the simultaneous transfer of ownership.
In fact, a 1031 Exchange gets its name from the United States Internal Revenue Code (26 U.S.Cоde § 1031) which states: "No gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment if such real property is exchanged solely for real property of like kind which is to be held either for productive use in a trade or business or for investment."
According to IRC section 1031, you can postpone the payment of capital gains tax if you reinvest it in a similar property or 'like-kind' property. A 1031 Exchange does not refer to the actual exchange of two real estate objects between two owners, but to the specific process of selling one object and buying another.
The common rules that govern the Florida 1031 Exchanges work the same way as any other 1031 Exchange in the United States of America, although, of course, there are certain nuances.
Analyzing the situation, we can say that 2022 is an opportune time to use a Florida 1031 Exchange due to rising real estate prices above the levels of the previous year.
The main mechanism of exchange is that the profit from the sale is reinvested in like-kind property of equal or greater value ’Like-kind' means that the nature or character of the property should be similar, although this has nothing to do with the class or quality of the corresponding properties.
In addition to the obvious immediate benefits of deferring capital gains taxes, 1031 Exchanges also allow investors to use their cash, increasing their purchasing power by easily switching to facilities with different levels of service.
Starting A 1031 Exchange
First of all, you have to identify the real estate you want to sell, because a 1031 Exchange only applies to commercial or investment real estate, and not to real estate for personal use.
The next step is to determine the property you want to buy. The real estate you are selling and the real estate you are buying must be 'like-kind', which means they have the same nature, character, but not necessarily the same quality or class. There is a certain terminology in the 1031 Exchange, when the property sold is usually called the 'downleg', and the property acquired with the proceeds is called the 'upleg'.
In order to facilitate 1031 exchange operations, it is necessary to find a qualified intermediary, which is sometimes called an exchange intermediar or QI. The proceeds from the sale will be directed straight ahead to escrow under the management of a qualified intermediary. This allows you to keep funds in your bank accounts and therefore exempts you from immediate capital gains taxation.
With the proceeds from the completion of the sale of 'downleg' real estate, you will be able to purchase 'upleg' real estate without paying capital gains tax when selling lower-segment real estate, if its total value is slightly higher and the exchange is completed on time.
There is a certain risk that you will be subject to capital gains tax if the proceeds from the sale ever arrive in your bank account or are identified in your name, or if you do not complete the exchange on time. You have to keep everything under control!
Some Florida 1031 Exchange Rules
Summing up the general provisions of a 1031 Exchange, we draw attention to a number of mandatory existing Florida 1031 Exchange rules and time frames.
A 1031 Exchange is not a simple phenomenon at all. It has already been mentioned that the exchanged properties of real estate should be the same in nature or character. In this case, it is clear that it is extremely difficult to find an owner who has a property that you like, and who at the same time wants to buy yours. It is clear that you cannot do without qualified assistants.
It is important to remember that there have been changes in Section 1031 If earlier this section allowed the exchange of a wide range of types of real estate and personal property items (works of art, franchises, equipment, partnership interests, shares in trade, securities, certificates of trust and beneficial interests), now no personal property or primary residence can be exchanged in accordance with section 1031. Only commercial or investment real estate is a subject to exchange.
Full list of the types of real estate that can participate in 1031 Exchanges:
- Vacant land (an improvement 1031 exchange can also be used to build on vacant land)
- Shopping malls and strip malls
- Golf courses and practice ranges
- Trailer or manufactured home parks
- Self-storage facilities
- Oil, gas, or mineral interests
- Water and ditch rights
- Parking lots
- Medical and dental practices
- Convenience stores
- Vacation homes or condos
- Gas stations
- Hotels and motels
- Rental properties
- Conservation easements
- Communication towers
- Nursing homes
All real estate participating in the exchange must be located only in the United States, although you can exchange an investment property in Florida for another property elsewhere in the country. By type, it can be real estate, such as apartment buildings, duplexes, single-family rental properties, rental of commercial office buildings, country houses or restaurant real estate.
The uniqueness of this exchange also lies in the fact that several real estate objects can be changed, for example, one or more to one or more.
To defer the payment of capital gains tax on the entire amount of proceeds from the sale of your property, you can invest in real estate of equal or greater value, including inspection fees and brokerage fees in the total value of the upleg property.
According to a 1031 Exchange, the name of the taxpayer (seller) must match both the downleg sale documents and the upleg purchase documents. However, to sell your property, you can use an LLC with one participant, but buy a new property only under your personal name.
In the practice of carrying out a 1031 Exchange, there are situations when the replaced property or real estate is worth less than the downleg part. In this case, capital gains tax is paid on the difference, which is called 'the boot'. Suppose that a property worth $ 1 million is being sold and two objects with a total value of $850,000 are being purchased, taxes are paid from the difference, that is, from the amount of $ 150,000. Capital gains tax rates vary depending on your income: 0%, 15% or 20%.
The exchanger must comply with the mandatory deadlines: 45- / 180- daily exchange rules. When selling a property (abandoned property), the investor has 45 days to determine the property of equal or greater value. And then another 135 days to purchase the specified property.
As discussed above, when making a 1031 Exchange, it is necessary to have a qualified intermediary, since the money from the sale of real estate should not go to the investor's account (exchanger), but to the intermediary's account to store income in escrow before using it to buy real estate to the upper level (upleg). monitors the fulfillment of obligations by the parties involved, the receipt of income, the timing of transactions.
In addition to the сommon rules of a 1031 Exchange, there are three other options within
the same exchange, which are used both
in Florida and in other states.
— A Reverse Exchange is the exact opposite of deferred exchange, when a new property is first bought and then an abandoned property is sold. This is not an easy option, since not all banks can provide loans for reverse exchange, so the option may be suitable only for owners who have enough cash for reverse exchange operations.
— A Simultaneous Exchange will require the participants to conduct an extremely masterful transaction so that the sale of the relinquished property and the purchase of the replaced property are completed at exactly the same time. With a slight delay, the exchange may be disqualified, and you will have to pay tax on the full amount of the sale of your property, even if both events occur on the same day. — An exchange for construction or improvement (Construction and Improvement Exchange) will improve the property being replaced with funds received from the sale of your abandoned property, although additional requirements will need to be met. Your chosen assistant - a qualified intermediary will keep the property document in trust for up to 180 days.
Of course, the general rules given in this article do not take into account all the cases encountered in practice.
In order to find a qualified assistant for a 1031 Exchange in Florida, to start and successfully conduct all transactions as well as to work with all documents, contact the specialists of VERA REALTY and VERA FUND. We will help you solve all the issues with a 1031 Exchange!
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