Owning real estate on Kauai is a dream for a lot of people. Some people will use a 1031 Exchange to make their dream of owning property on Kauai come true!
What is a 1031 Exchange? Under Section 1031 of the United State Internal Revenue Code exchanges of certain types of property may defer the recognition of capital gains or losses due upon sale, and hence defer any capital gains taxes otherwise due.
Weather you want to buy or sell a real estate investment on Kauai you can utilize a 1031 Exchange to your advantage. As a Realtor I can not give you tax advice. Always consult with your tax advisers as they are essential to a successful tax-deferred exchange.
Here are the answers to basic 1031 Exchange questions I'm often asked from people wanting to use this vehicle on Kauai.
- What properties qualify for an IRC 1031 Exchange treatment? To do a 1031 Exchange the relinquished real estate must be exchanged for replacement property that is like-kind. This can be confusing because there is a lot of misinformation out there a to what qualifies as "like-kind". Per the IRC ( Internal Revenue Code 1031 Exchange ) real property (real estate) is like-kind to other real property whether improved or unimproved and whether used for different purposes. One can exchange to and from any one of the following options.
- Single Family Rentals
- Farms/Ranches
- Office/Commercial
- Motels/Hotels
- Multi-Family Rentals
- Raw Land
- Retail
- Industrial
- Leasehold interest of 30 years or more
2. What is the timeline in a 1031 Exchange? Typically people utilize the delayed exchange.
The delayed 1031 Exchange starts with the owner declaring (in writing and with a Qualified Intermediary) their intent to do a 1031 Exchange before the relinquished property is sold. The Qualified Intermediary can do this very quickly if you find yourself a few days away from closing and are still interested in doing a 1031 Exchange (contact me if you need a referral for a good Qualified Intermediary).
The 1031 timeline provides investors up to 180 days to purchase a replacement property once the relinquished property is sold. Within 45 calendar days of the close of the relinquished property, the Exchanger must identify in writing replacement property.
3. How Do I Identify replacement property in a 1031 Exchange? There are thee identification rules that apply.
- 3 Property Rule: Three properties no matter what the fair market value.
- 200% Rule: Any number of properties as long as the aggregate fair market value does not exceed 200% (2x) of the fair market value of all the relinquished properties.
- 95% Rule: Any number of properties without regard to value, provided 95% of the value of the identified properties is acquired.
Once the relinquished real estate has been sold, and the replacement property has been identified you must purchase the replacement real estate within 180 calendar days from the sale of the relinquished property, or the Exchanger's tax filing date (assuming no automatic extension is applied for), whichever is earlier.
When doing a 1031 Exchange it is even more important than usual to use a Realtor that knows the process. No, Realtors do not give tax advice, but a Realtor experienced with 1031 Exchanges know the timelines, and qualifying factors. On top of that I know what the typical pitfalls are when doing a real estate transaction under specific time restraints with severe consequences.
As always please call/text/email me with any questions. I understand that most people need to have several exploratory conversations before making your decisions on how you'd like to move forward. I'm here to discuss your options with you.
Aloha,
Anne Eliason
Posted by Anne Eliason on
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