When you sell off an investment property and profit from its sale, the transaction is subject to capital gains tax in Florida. But with a 1031 like kind exchange, you can defer the taxes. That’s provided that you reinvest the entire sales proceeds into a like-kind investment.
The IRC’s Chapter 1031 lends its name to a 1031 exchange, which involves the sale of an investment, rental or vacation properties. It can also include the sale of personal property like a yacht or plane.
How A 1031 Like Kind Exchange Works In Florida
There are 3 specific processes involved in a like-kind exchange.
Finding the right intermediary
Under section 1031, you are not permitted to sell a property with the sole purpose of executing the 1031 exchange.
The good news is that it’s easy to use it to buy a replacement property. You need a qualified intermediary who will temporarily take possession of the sale proceeds while you find a new investment property.
Finding the perfect like-kind property
The IRS allows you 45 days to choose a like-kind property. This countdown starts from the day you complete the sale of the first property.
In this regard, “like-kind” refers to the property you replace the one you sold with. According to the IRS, the like-kind property must be of the same nature, character, or class to qualify for a 1031 tax exemption.
During the 45-day timeframe, and provided you’ve executed a 1031 exchange, you can choose as many as three different properties without worrying about value limits. But any properties you may choose beyond the three may not have a value higher than 200% of the value of your property you sold.
Closing on the like-kind property
This is the most daunting part of the 1031 like kind exchange process, particularly in Florida.
Once you start the exchange process, you have 180 days to close on your chosen replacement property. It sounds like a long time, but experienced investors will tell you that months can fly by and the property sale could fall through. That would render your exchange invalid.
Even if the sale falls through for reasons that are beyond your control, your 1031 like-kind exchange may be deemed invalid.
Buying your replacement property within the 180 days timeframe is critical. The best way to make sure everything goes smoothly is to work with the experts.
Flips Don’t Qualify for A 1031
It’s important to note that everything regarding a 1031 like kind exchange relates to long-term investment properties. If you want an immediate resale instead of something long-term, you probably won’t qualify for a 1031.
Properties that are bought to flip, or fix up, or for quick resale aren’t recommended for a 1031. That’s because the IRS considers them inventory as opposed to long-term investments.
However, there are a few things you can do to try and qualify such properties for a 1031 exchange. For instance, you could hold onto the property for at least 12 months and one day to reach a long-term capital gains tax rate. Or you could rent the property at market value to produce an income.
Take note, though, that these two examples don’t necessarily allow your flip or fixer-upper property to qualify for the 1031 tax exemption. You might need to establish other circumstances and facts, like depreciation or rental history.
That’s why you should consult with a qualified property attorney who has ample experience with 1031 like-kind exchanges.
Take Note of the Deadlines
As we mentioned, you have 180 calendar days from the day you sell your relinquished property to close on your replacement property. But, you only get 45 calendar days to identify three or more potential replacement properties and formally submit your list.
There are no extensions or exceptions to deadlines. If you miss them, you won’t receive your 1031 like kind exchange.
So, it’s best to get in touch with an attorney before you sell your property and begin the entire 1031 process to ensure everything is in order and within the deadlines.
Book an appointment at Principal Law Firm to discuss your like-kind requirements.
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