We often get asked about capital gains tax when an investor client is looking to sell their investment property. As Realtors, we can provide limited information in this area, but we work with many professionals who are available to help guide our clients successfully through their options. We asked Adam Nishikawa, Vice President of Exchange Resources, Inc. in Scripps Ranch, to share his expertise on this topic.
Adam, is it possible to sell an investment property without paying capital gains tax?
Many investors do not realize they can defer the payment of capital gains taxes through a transaction known as an IRC 1031 Exchange.
What is an IRC 1031 Exchange?
The IRC 1031 Exchange is a transaction that permits an investor to defer capital gains tax by “exchanging” investment property owned by the investor (“relinquished property”) for another investment property (“replacement property”) of equal or greater value.
Why would an investor want to consider an IRC 1031 Exchange?
During the sale of an investment property, taxes (such as long-term capital gain, depreciation recapture, Medicare surcharge tax, and state capital gain taxes) significantly eat into an investor’s profit. Through the IRC 1031 Exchange, an investor can defer the payment of these taxes by exchanging like-kind real property for like-kind real property of equal or greater value. It’s a fundamental tool for creating wealth and stimulating the economy.
Are there different kinds of exchanges?
The most common type of exchange is the Delayed Exchange. Certain IRS requirements must be met to structure a delayed exchange. A Simultaneous Exchange occurs when the relinquished property and the replacement property are transferred concurrently. An investor may choose to improve a replacement property by building a structure or making improvements to an existing structure on the property in a Build-to-Suit Exchange. The Reverse Exchange is the most complex type of exchange. It allows the investor to acquire their replacement property before the relinquished property is sold.
How do you initiate a 1031 Exchange?
It’s important to choose a professional Qualified Intermediary (QI) for a successful exchange in accordance with US Treasury Regulations. QIs cannot be an existing or previous employee, attorney, accountant, investment banker or broker. Look for a company with strong financials and several layers of protection to secure its investors’ funds.
There are many complex issues and qualifications in IRC 1031 Exchanges. We are here to answer questions and provide scrupulous and transparent transactions for our clients. For more information, visit our FAQ page or contact us directly at (877) 799-1031 | [email protected].
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