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.
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 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!