How Does a 1031 Exchange Work in Florida?

Entering a 1031 Exchange is a strategic move for many investors, allowing them to defer capital gains taxes and preserve their wealth for longer. This transaction follows the framework created by Section 1031 of the Revenue Code, which is applied at the federal level. However, each state imposes unique rules, even though they follow IRS regulations.

Realized 1031 turns the focus to Florida for investors who are about to execute a 1031 Exchange involving Florida assets. Keep reading to learn more about how these transactions work on a state level and special considerations you’ll want to keep in mind.

Basics of Florida Like-Kind Exchange

Florida conforms to Section 1031 rules, following IRS regulations as a baseline for these transactions. This means that all 1031 Exchanges in the state must adhere to the following.

• Like-Kind Properties: You can only exchange properties that are like-kind. More specifically, these assets must have been held for business or investment use. These include commercial buildings, multifamily residential properties, and vacation homes that adhere to standards set by Revenue Procedure 2008-16.

• Timelines: The entire exchange must happen within the 180-day timeframe imposed by the IRS. Within this deadline is the 45-day identification period, which begins right after you close the sale of the relinquished property.

• Control of Funds: As the exchanger, you cannot have direct control of the proceeds from the property sale. This would create a constructive receipt, which is a taxable event. As such, working with a qualified intermediary is critical.

• Reinvestment of All Proceeds: All proceeds from the relinquished property sale must be reinvested into the replacement property. Any leftover cash or mortgage relief you receive is considered a non-like-kind boot, which is taxable.

When the exchange is conducted in compliance with these rules, investors are able to defer capital gains taxes at the federal level. However, at the state level, the situation is simpler: you are not paying any capital gains taxes by default because Florida doesn’t levy income taxes.

The 1031 Exchange Florida Process

Given how Florida doesn’t have any capital gains taxes, it stands as one of the most 1031 Exchange-friendly states. Conducting the swap here follows the same process as the federal procedure.

• Engaging with a QI: You’ll need to work with a QI before starting the exchange, as they are the entity overseeing the entire exchange.

• Selling Relinquished Property: The sale follows the traditional process in most typical cases. Your QI can help you find a broker/dealer who understands 1031 Exchanges and helps you remain compliant.

• Identification Period: After closing the sale, the timeline starts. You must identify up to three properties and submit the details to your QI within 45 days.

• Negotiations and Closing: The next step is to negotiate with the seller of the replacement property and close the sale. Your QI must transfer the funds to the seller during closing to prevent your direct control of the proceeds.

Specific 1031 Exchange Rules in Florida

Florida, as a whole, doesn’t impose income taxes. This means that even capital gains taxes aren’t levied for real estate transactions. As such, 1031 Exchange-specific rules for the state are typically nonexistent. However, a few tax laws may affect the exchange.

Documentary Stamp Tax

Unlike most other states, Florida imposes a Documentary Stamp Tax on the transfer of real estate. This tax is due when the deed is recorded for both the sale of your relinquished property and the purchase of your replacement property.

The rate depends on the county. For example, most counties charge $0.70 per $100 of the purchase price. However, Miami-Dade County follows $0.60 per $100. This creates an impact on 1031 Exchanges since these taxes are considered closing costs.

Vacation Rental Exchanges

As a hub for secondary and vacation homes, Florida is more than likely to create a complicated 1031 Exchange because of Revenue Procedure 2008-16 rules. Having a keen understanding of the safe harbor language ensures that you are conducting a compliant exchange and minimize chances of IRS scrutiny.

County-Level Rules

While not a tax rule, Florida’s local municipalities have very specific (and frequently changing) laws regarding short-term rentals. These can create issues with Revenue Procedure 2008-16 compliance. As such, engaging with CPAs familiar with these rules helps you avoid the trap of having secondary homes that no longer qualify as like-kind assets.

Summing Up: How 1031 Exchanges Work Florida

Florida 1031 tax deferral transactions follow the same rules as federal exchanges. However, the state’s lack of income taxes means only federal-level capital gains are deferred. Even so, the state and its counties have their own rules that investors must consider when conducting the swap. This knowledge helps plan for possible taxes and deductions that might affect the exchange and your overall financial planning.

Sources:

https://floridarevenue.com/taxes/taxesfees/Pages/doc_stamp.aspx

https://nstp.org/memberarea/federaltaxalert/2023/what-is-boot-in-a-1031-exchange

https://www.irs.gov/pub/irs-drop/rp-08-16.pdf