This is the final post of this four-part series on 1031 exchanges.  Internal Revenue Code Section 1031 provides a great chance to deferring taxes and build wealth.  The Internal Revenue Code rules are complicated, so please consult your tax professional.  Let’s answer some Frequently Asked Questions.

Q:  How do I identify replacement property?
A:  The identification must be submitted in writing, unambiguously described, signed by the investor and delivered to the title company before midnight on the 45th day.  The title company will provide the necessary forms.

Q:  What happens if I change my mind and want to cancel my exchange?
A:  If you transfer the relinquished property and do not replace it with another, the sale will be a taxable event and any capital gain will be subject to federal and state capital gains tax.  If you decide to cancel the exchange after the title company has received exchange proceeds, access to those proceeds may be limited until certain time periods elapse.

Q:  What if I sell a property and then decide I want to make it part of a tax-deferred exchange?
A:  If you actually or constructively received proceeds from the sale, it may not be possible to include that property in a tax-deferred exchange.  If you have entered into a contract to sell, but have not closed, it mat be possible to carry out a tax-deferred exchange, provided you execute the proper exchange documents, identify the replacement property within 45 days of the closing and actually receive it within 180 days or before your tax return is due.  Consult your attorney and tax advisor to help you make that determination.

Q:  What is "boot"?
A:  Boot can be cash received from the sale of relinquished property or other non-cash consideration, including any property that is not "like-kind", promissory notes or debt relief (mortgage boot).  If you receive boot in an exchange, it is likely that all or some portion will be taxed.

Q:  Can or should I do a tax-deferred exchange for my personal residence?
A:  No, your principal residence is not considered investment property and therefore, does not meet the requirements of Internal Revenue Code Section 1031.

Read Part 1

Read Part 2

Read Part 3

Please contact Michael Zimmerman if you have a specific question about 1031 exchanges or search for investment opportunities using my Honolulu home search.

This information is provided as a courtesy only, is not a warranty and should be independently investigated by buyers. This information is deemed reliable, but NOT guaranteed.  Consult your attorney and tax advisor before you exchange investment property.

You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.