An investment property owner selling a property can potentially owe up to four different taxes: deprecation recapture of 25 percent, federal capital gains of either 15 or 20 percent depending on taxable income, 3.8 percent net investment income tax when applicable, and state tax (as high as an additional 13.3 percent in California).
IRC (Internal Revenue Code) Section 1031 refers to the 1031-tax-deferred exchange, which provides the investor with a way to delay paying these taxes by exchanging an investment property for another.
The 1031-tax-deferred exchange is quite common; however, there are a few forgotten rules many investors overlook.
The timeline starts when you close on the relinquished property
You will have 180 days to complete the exchange after you close escrow on the relinquished property (the property you are selling). However, you are required to identify the potential replacement properties within the first 45 days.
A purchase agreement needs to include specific language
The sales contract will need to include specific language whether buying or selling a property. One provision is that the sales contract can be assigned to the exchange accommodator.Read More