The best way to get around disability is to use a qualified intermediary or IQ, as if you were making a deferred trade. The IQ sells the property on your behalf and receives the money from the sale. She then uses this product to purchase your replacement property. Whether transactions are made at the same time, minutes apart, on the same day or even in a few weeks, since you have not received the money, you do not have to pay transaction taxes. The problem with a simultaneous exchange is that if you accept money or put it in an escrow account, it is considered a boat – a higher value than the property exchanged – and is taxable. When you receive a deposit, it is considered a taxable profit. Even if there is a delay between the exchange of documents, it is not considered an exchange. Finally, if you sell your property and buy the replacement from a third party, you need to get the money to give it to them so that it doesn`t technically qualify as a “simultaneous” exchange. You don`t actually need a special agreement to make a 1031 exchange. However, you must include a special language in your purchase and sale contracts. Although the tax number does not indicate the exact wording, the language must clearly indicate that you intend to make a 1031 exchange. When exchanging documents, your agreement must also specify how this process will be carried out.
If you exchange investment properties such as rental houses for replacement investment properties, you can structure the transaction as an exchange in Article 1031 of the tax legislation. If you do, you can avoid paying capital gains or depreciation taxes. Instead, you move your tax base into the new property. However, when you end up cashing out, you`ll have to pay back any capital gains and taxes that have accumulated. In a true simultaneous exchange, the two sides sit at the closing table and literally exchange deeds. When this happens, no money changes hands and neither party owns the other property for a while. One moment you own property A and the other party owns property B and the next moment you own property B and it has property A. These types of exchanges are actually quite rare.
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