Paige Martin asked: Property owners that are looking to sell in Houston, Texas may benefit with a 1031 exchange, which will provide them with tax benefits.
These benefits come because with a 1031 exchange, a property transaction is viewed as an exchange of one property for another, instead of selling one property and then purchasing another.
Once a property is sold, the owner is taxed on the sale of a property. If the property instead is exchanged, there are no taxes to be applied. However, just because these exchanges may be an available option for Houston, Texas property owners, there are rules and regulations that need to be adhered to before an owner can be eligible for a 1031 exchange.
The 1031 Tax Exchange is outlined in the U.S. tax code and treasury regulations. In order for a property to be eligible for these types of exchanges, the property must fall within the boundaries outlined.
The first rule is that the property that is being exchanged must be “like” property. For instance, any property that is located within the United States is considered “like-kind.”
Property outside of the United States is not so property cannot be exchanged outside of the country. This is another reason why 1031 exchanges may be beneficial for property owners in Houston, Texas, because the property will most likely be located in Houston.
Also when looking at “like-kind” property, the property that is being acquired must be of equal or greater value than the property that it is being exchanged for.
There is also an exception rule within the 1031 Tax Exchange. Certain types of property may be excluded, even if they are located within Houston, or other areas of the United States.
These exclusions include: property that is being held for sale for a profit, inventories, stocks, bonds, and notes, other securities or evidence of indebtedness, if the owners are looking at a partnership, and other beneficial interests.
Then there is the exchange component of the 1031 Tax Exchange. For property owners to be eligible for the 1031 Tax Exchange, the property must actually be exchanged, instead of the property being sold and then the owner using the money from the sale of that property to purchase another. That type of transaction would be viewed as a simple sale of property and would not be eligible for a tax exchange.
Another rule written into the U.S. tax code states that any funds from the original sale of property, must not go to the property owner or the property owner’s agent. Instead, they must be given to a qualified intermediary. That qualified intermediary is generally an individual, or company that works exclusively with dealing with 1031 tax exchanges.
They must have no other contact with the owner other than serving as a qualified intermediary for the exchange that is about to take place. The intermediary will be responsible for holding funds related to the exchange and for distributing them as needed. If in the end there are proceeds that are rightfully the owners, those funds will be taxed.
In addition to the different rules that accompany a 1031 tax exchange, there are also certain timelines that must be adhered to. There are two timelines specifically that must receive particular attention. The first timeline is the Identification Period.
This refers to the amount of time that a property owner has to find replacement properties that he is interested in purchasing. This time period is within 45 days of selling the original property. The 45 days is 45 days exactly and includes holidays and weekends. This timeline will never be extended and if an owner cannot find replacement properties within that time, the property that had been sold will no longer be eligible for a 1031 tax exchange.
The other timeline property owners must concern themselves with is the exchange period timeline. This refers to the period of time that a property owner selling his property must become owner of another property.
The time period for this is 180 days from the time the original property is sold. The time period is over on the date the property is fully relinquished or when the person’s tax return for that current year is due, whichever date comes first.
So while property owners in Houston, Texas may want to further investigate 1031 Tax Exchanges to see if it’s possible to receive tax benefits, it’s important to fully understand this tax code to ensure that you meet all the rules and requirements that will make you eligible.
Herman
