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A 1031 exchange gets its name from Section 1031 of the U.S. Internal Revenue Code which allows you to avoid paying capital gains taxes when you sell an investment property. There are a few different types of 1031 exchange structures in the state of Missouri.
Simultaneous Swap
To accomplish a Section 1031 exchange, there must be an exchange of properties. The simplest type of Section 1031 exchange is a simultaneous swap of one property for another.
Deferred Exchanges
Deferred exchanges are more complex but allow flexibility. They allow you to dispose of property and subsequently acquire one or more other like-kind replacement properties.
To qualify as a Section 1031 exchange, a deferred exchange must be distinguished from the case of a taxpayer simply selling one property and using the proceeds to purchase another property (which is a taxable transaction). Rather, in a deferred exchange, the disposition of the relinquished property and acquisition of the replacement property must be mutually dependent parts of an integrated transaction constituting an exchange of property. Taxpayers engaging in deferred exchanges generally use exchange facilitators under exchange agreements pursuant to rules provided in the Income Tax Regulations.
Reverse Exchange
A reverse exchange is somewhat more complex than a deferred exchange. It involves the acquisition of replacement property through an exchange accommodation titleholder, with whom it is parked for no more than 180 days. During this parking period the taxpayer disposes of its relinquished property to close the exchange.
There are also some rules and regulations involved with taking advantage of this perk, though so I want to make sure you’re well informed.
First of all, upon the sale of your property, proceeds from your sale must be held by a qualified intermediary-a person or company that agrees to facilitate the 1031 exchange by holding the funds involved in the transaction until they can be transferred to the seller of the replacement property.
Second, the identification and purchase of another “like kind” property, must take place within certain time constraints. In Missouri, the Seller has 45 days to identify an appropriate replacement property and 180 days to acquire said property. Unfortunately, in order for the tax deferment to be honored, these limits cannot be extended under any circumstances with the exception of presidentially declared disasters.
Here are some steps for completing a Missouri 1031 Exchange. I’d love to help out-experts in real estate and finance are a must for this type of transaction. Feel free to reach out with questions or concerns or to get the process started.
1. CONSULT Speak with your tax and financial advisors before selling your property to make sure a 1031 exchange is right for you.
2. FIND A QUALIFIED INTERMEDIARY (QI)Choose a QI before you close escrow. They will hold your exchange proceeds during the transaction process.
Do not take receipt of funds – all proceeds must go to the QI or 1031 is invalidated.
3. CHOOSE REPLACEMENT PROPERTY You have 45 days to “identify” replacement property, and 180 days to close on the relinquished property.
Meyer & Company Real Estate specializes in locating like-kind replacement property at equal or greater value for full tax-deferral.
4. DEBT OR NO DEBT? The IRS requires matching the debt from your relinquished property with equal or greater debt in the replacement property.
Don’t need debt? You can buy properties with debt or without.
Debt always brings some risk to real estate ownership, but can provide the benefit of increasing depreciable basis and sheltering some cash flow from taxation.
5. PROCESSING & PAYMENT After you select your replacement property, Meyer & Company prepares your purchase documents and sends them to you for signature.
Next, sign paperwork with your QI releasing your sale proceeds to the escrow account.
6. RECEIVE DISTRIBUTION After you’ve closed on the replacement property, cash flow distributions are typically made monthly and deposited directly into your bank account.