What You Need to Know for a 1031 Exchange in California - AB Capital (2024)

FAQs

What You Need to Know for a 1031 Exchange in California - AB Capital? ›

The main requirements for a 1031 exchange are: (1) must purchase another “like-kind” investment property; (2) replacement property must be of equal or greater value; (3) must invest all of the proceeds from the sale (cannot receive any “boot”); (4) must be the same title holder and taxpayer; (5) must identify new ...

California recognizes 1031 Exchanges which allows an investor to defer capital gains taxes as long as you are purchasing another “like-kind” property to replace the one you are selling. California does recognize it if you purchase your upleg in another state, but beware of the above “Clawback” rule.

Under IRC §1031, the following properties do not qualify for tax-deferred exchange treatment: Stock in trade or other property held primarily for sale (i.e. property held by a developer, “flipper” or other dealer) Securities or other evidences of indebtedness or interest. Stocks, bonds, or notes.

Under the Tax Cuts and Jobs Act, Section 1031 now applies only to exchanges of real property and not to exchanges of personal or intangible property. An exchange of real property held primarily for sale still does not qualify as a like-kind exchange.

California regulations employ a “Claw back” provision that requires any gain in property value accrued in California at be subject to California state taxes, regardless of whether or not that property was exchanged for one in another state.

The only minimum required hold period in section 1031 is a “related party” exchange where the required hold is a minimum of two years.

The two most common situations we encounter that are ineligible for exchange are the sale of a primary residence and “flippers.” Both are excluded for the same reason: In order to be eligible for a 1031 exchange, the relinquished property must have been held for productive in a trade or business or for investment.

The taxpayer and the related party must hold the properties that each received as part of the 1031 Exchange transaction for a minimum of two (2) years. The two (2) year holding period starts running on the date of the transfer or conveyance of the last property involved in the 1031 Exchange related party transaction.

Commercial property including rental properties, condominiums, shopping centers, strip malls, timberland, gas and water interests, and land represent real property eligible for a 1031 exchange. One of the popular examples of 1031 Exchange replacement properties include Delaware Statutory Trusts or DST properties.

How can I avoid capital gains tax without a 1031 exchange? ›

If you cannot complete your 1031 exchange, then your qualified intermediary may be able to transfer the funds from your property sale to the deferred sales trust. By transferring to the trust, you can avoid constructive receipt and defer your capital gains tax.

While there are no definitive rules on a holding period for a 1031 exchange property, it has made rulings indicating that a holding period of two years has been considered sufficient in order to meet the qualified use test.

The qualified intermediary holds the money until you acquire the replacement property and your qualified intermediary will deliver funds to the closing agent.

DST Returns On Investment - What Could You Expect? Typical DST Returns on a 1031 exchange investment could yield between 5%- 8% of monthly distributions based on your fractional interest.

When the relinquished property closes, the person conducting the exchange has 45 days to identify their potential replacement properties. In total, one has 180 days to acquire the replacement property. Your exchange is completed in 180 days.

A successful 1031 exchange isn't a do-it-yourself project. You must follow IRS rules to realize the tax deferral benefits and you'll need a middle person, called a qualified intermediary (QI).

IRC Section 1031 provides an exception and allows you to postpone paying tax on the gain if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange. Gain deferred in a like-kind exchange under IRC Section 1031 is tax-deferred, but it is not tax-free.

CALIFORNIA. Withholding: 3.33% of the sales price if the property is over $100,000. Exemption: Submit Form 593-C and certify as part of a 1031 exchange. Non-resident sellers seeking an exemption must submit Form 593-W to the California Franchise Tax Board.

There is no way to avoid this situation unless one stays out of CA entirely or performs the final sale there.

Can you still do a 1031 exchange in 2023? ›

The extensions permit eligible persons who began an IRC §1031 exchange between July 12, 2022 and January 8, 2023, to extend the 180-day exchange period to the later of October 16, 2023 or 120 days after the original 180-day deadline date.

SELLING MULTIPLE PROPERTIES IN AN SECTION 1031

When performing a Section 1031 tax-deferred exchange, an exchanger may sell multiple relinquished properties in a single exchange, exchanging several properties into one (or multiple) replacement properties.

Your personal use of the property, including occupancy, must not exceed either 14 days or 10% of the total number of days you rented out the property within 12 months. This exchange only applies to single-owner properties. Once the 24 months conclude, you can move into the property and declare it a primary residence.

The bottom line is that second homes, or vacation homes, are not considered investment use property solely based upon the hope the property will appreciate and in order for a valid Internal Revenue Code Section 1031 states that "no gain or loss shall be recognized on the exchange of property held for productive use in ...

Delayed 1031 Exchange

This 1031 real estate exchange program is the most common. The investor relinquishes their property before acquiring the replacement property. In other words, you first transfer the property you want to give up before securing the desired replacement.

The 1031 Exchange is an option that allows active real estate investors to sell a property and subsequently defer the taxes from capital gains and depreciation recapture as long as they buy a “like-kind” property within a certain timeframe that is of equal or greater value.

The main benefit of carrying out a 1031 exchange rather than simply selling one property and buying another is the tax deferral. A 1031 exchange allows you to defer capital gains tax, thus freeing more capital for investment in the replacement property.

You only pay the capital gains tax after you sell an asset. Let's say you bought your home 2 years ago and it's increased in value by $10,000. You don't need to pay the tax until you sell the home.

Are closing costs deductible in a 1031 exchange? ›

Certain expenses paid at a closing are considered “exchange expenses” and using exchange funds to pay those expenses won't result in any tax liability to an investor doing a 1031 exchange.

There is no restriction on the number of times you can participate in a 1031 exchange. As long as you meet all the requirements and have an experienced intermediary by your side, you can use this tool as often as possible to minimize your capital gains taxes.

The advice generally rendered is that your 1031 Exchange has failed and will not qualify for tax deferred treatment; in short, it's taxable. It may not be taxable immediately, however, depending on a number of factors.

A 1031 Exchange allows owners of business or investment property to defer the recognition of the capital gains tax normally due upon the sale of the property so long as they use the proceeds to buy another business or investment property of equal or greater value.

The 95% rule says that a taxpayer can identify more than three properties with a total value that is more than 200% of the value of the relinquished property, but only if the taxpayer acquires at least 95% of the value of the properties that he identifies.

The exchange funds can be used only to buy Replacement Property, pay closing costs or pay off a mortgage or deed of trust covering the Relinquished Property.

In a standard 1031 exchange, you need to reinvest 100% of the proceeds from the sale of your relinquished property to defer all capital gains taxes. In a partial 1031 exchange, you can decide to keep a portion of the proceeds. This boot amount is taxable, while the money you reinvest is not.

In a traditional 1031 exchange, the investor sells the identified property first but must ensure that they do not take possession of the proceeds from the sale. For that reason, engaging in a 1031 transaction requires using a Qualified Intermediary throughout the process.

To have a valid 1031 exchange, a qualified intermediary (“QI”) must be assigned the seller's rights to proceeds under the contract and transfer the relinquished property on behalf of the seller, pursuant to an exchange agreement.

Four states – California, Oregon, Montana, and Massachusetts – have what's known as clawback provisions. These states impose a state tax on any realized gains from the sale of investment properties.

Can you do a 1031 exchange in two different states? ›

The answer is yes, it is possible to trade into property located in another state. Under Internal Revenue Code Section 1031, real estate located in one U.S. state is like kind to real estate located in any other state, and you can trade from one state to another.

The two years don't need to be consecutive, but house-flippers should beware. If you sell a house that you didn't live in for at least two years, the gains can be taxable.

Unlike a 1031 exchange, a DST allows the seller to diversify into other holdings, including assets or financial instruments that are not typically allowed by other capital gain deferral methods, such as stocks, bonds, or mutual funds.

States like Florida, Texas, and Nevada are great options for 1031 exchanges due to their lack of state income tax and strong real estate markets. On the other hand, states like California, New York, and Oregon can be less attractive due to their high state income tax rates and strict real estate laws.

The main benefit of carrying out a 1031 exchange rather than simply selling one property and buying another is the tax deferral. A 1031 exchange allows you to defer capital gains tax, thus freeing more capital for investment in the replacement property.

Your personal use of the property, including occupancy, must not exceed either 14 days or 10% of the total number of days you rented out the property within 12 months. This exchange only applies to single-owner properties. Once the 24 months conclude, you can move into the property and declare it a primary residence.

The 2-out-of-five-year rule states that you must have both owned and lived in your home for a minimum of two out of the last five years before the date of sale. However, these two years don't have to be consecutive, and you don't have to live there on the date of the sale.