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1031 Exchange: Mistakes Sellers Make

August 11, 2022 by chorton Leave a Comment

An IRS 1031 Exchange, also known as 1031 or similar-kind exchange, allows the seller to take the proceeds of a property sale and reinvest them in another property. This is done to defer capital gains, or losses, that would otherwise have been realized at the date of the sale. If done correctly, the process can be smooth. However, mistakes can result in legal consequences, financial loss, or a failed transaction.

Advanced planning is important when you are trying to do a 1031 exchange. Similar-kind exchanges can only be used for properties that are held for business or trade purposes. To determine if a 1031 exchange is right for you, clients should speak with their tax advisors and tax or real estate lawyers. Title officers and real estate attorneys point out that sellers may miss these opportunities by not knowing about 1031 exchanges until closing. However, by that time, it is too late.

A seller can choose a replacement property in a 1031 exchange within 45 days. This is a time limit that may be short for identification, negotiation and financing.

Sellers need to be aware of this 45 day window. They should keep track of the exact date and whether it falls on a weekend or holiday.

A seller’s biggest mistake is failing to identify multiple replacement properties. Sellers may miss a deadline if they fail to have multiple replacement properties identified.

Sellers could be at risk by being a part of a 1031 Exchange if things don’t go as planned. Not just any person can oversee the transaction, but also a qualified intermediary with a great reputation and experience. Failing to do this can lead to mismanagement, loss of funds, or even a breach-of-contract lawsuit. Unregulated markets make it difficult to identify qualified intermediaries. For these types of transactions, sellers should contact tax advisors, tax lawyers, tax attorneys, or real estate attorneys. They can help identify qualified intermediaries that can assist with such transactions.

 

Original Blog: https://www.texasrealestate.com/members/posts/mistakes-sellers-make-on-1031-exchanges/?utm_medium=email&_hsmi=222259243&_hsenc=p2ANqtz–sGmWDyzG1GgAJQYufy0qNiQ3coeAQhrOWZqzaBlF9-ilVtQXwy-u4XDJL8xpMFF05dLPGIlsf_8SYpvMoo5Ei3UWBuA&utm_content=222259243&utm_source=hs_email

Filed Under: Blog Tagged With: 1031 exchange, Blog, buying property, IRS, Preferred Properties of Texas, property, real estate, selling property, stephenville tx

Selling Your Home, The Tax Angle

March 31, 2021 by chorton Leave a Comment

The buying and selling of homes are the largest financial transactions you may make, and as with most financial transactions, there’s a tax angle. If you know what your tax implications are as you go into the deal, you’re better able to plan and avoid unpleasant surprises.

Unlike with most other capital gains, the government gives you a big break when selling your principal home for a profit. You can exclude up to $250,000 ($500,000 if married filing jointly) of the profit from the sale. This exclusion is available for an unlimited number of times. And it applies to houses, apartments, condominiums, stock cooperatives, and mobile homes fixed to land.

However, there are other rules and limitations. To take advantage of the exclusion, you must own and occupy the home as your principal residence for at least two years before you sell it. Owning it and occupying it are two different things, however, and although you have to meet both tests, you don’t have to do this simultaneously. As legal site Nolo explains, “As long as you have at least two years of ownership and two years of use during the five years before you sell the home, the ownership and use can occur at different times.” This is an eligibility break for renters-turned-buyers, who can count rental time before the purchase as part of the “occupy” time.

Also note the word “principal.” This is your main home, where you spend most of your time. You can only have one principal residence at a time. If you have a townhouse in the city where you work but spend August in your country home, your townhouse is still your principal residence.

The IRS also imposes conditions to be eligible for the larger $500,000 married exclusion. You must meet all the conditions below:

  • You are married and file a joint return for the year.
  • Either spouse meets the ownership test.
  • Both spouses meet the use test.
  • During the two-year period ending on the date of the sale, neither spouse excluded gain from the sale of another home.

If a spouse is deceased, under what conditions can the surviving spouse use the $500,000 exclusion? You have to meet all of the following conditions:

  • You sell your home within two years of the death of your spouse.
  • You haven’t remarried at the time of the sale.
  • Neither you nor your late spouse took the exclusion on another home sold less than two years before the date of the current home sale.
  • You meet the two-year ownership and residence requirements (including your late spouse’s times of ownership and residence if need be).

Getting a Break on Improvements

If you’re single and buy a house for $300,000, you’re limited to a sale later of $550,000 before you start having to pay taxes. However, any improvements you made will increase that $300,000 basis, and the IRS is generous in what it considers an improvement. You can add a new room, landscaping, a heating system, new siding — even a satellite dish. General repairs, like fixing a broken windowpane, do not add to the basis. But fixing the windows as part of a larger renovation project will count.

The bottom line? When selling a home, work with professionals to make sure your plans are aligned with tax rules.

Contact our office to speak with one of our knowledgeable agents.

Filed Under: Blog, Selling Your Home Tagged With: Blog, IRS, selling a home, taxes

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