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What is Revenue Procedure 2002-22?
In March of 2002, the IRS issued guidance for investors regarding undivided fractional interest when purchased as replacement properties in 1031 exchanges. In the form of Revenue Procedure 2002-22, the advice superseded and repealed Revenue Procedure 2000-46. 2002-22 issued the guidelines under which taxpayers could seek an advance ruling for treating undivided interests as allowable assets under Section 1031.
1031 Exchange Investment Timeline and Tax Implications
For investors intent on benefitting from the substantial advantages available through strategic employment of Section 1031 of the Internal Revenue Code, timing is critical. The foundation of the 1031 exchange is the concept that when an investor uses the proceeds of a property sale to purchase another property, the investor is, in effect, continuing the investment. Because the taxpayer is reinvesting all the profits, the IRS doesn't require payment of taxes on cash the taxpayer didn't receive. The investor should be aware that the tax is deferred, not eradicated. That means that if the taxpayer later sells a property without exchanging it for another qualified “like-kind” investment as a replacement, they will owe taxes on the accumulated gains.
1031 Exchange On A Primary Residence
The basics of the 26 U.S. Code §1031 “Exchange of Real Property Held for Productive Use or Investment” are that you can exchange any real property “held for productive use in a trade or business” into another such real property, and defer capital gains taxes on that exchange.
What Is the Time Frame To Identify A Like-Kind Property?
In a 1031 exchange, there is a specific time frame to identify a like-kind property that will replace the relinquished investment. An investor must identify a like-kind property to a Qualified Intermediary within 45 calendar days from the close of the relinquished investment.
How Does A 1031 Exchange Affect The Seller?
Experts pay a great deal of attention to the taxpayer's actions required for completing a Section 1031 exchange. Less advice is available to the investor selling property as the replacement asset in that 1031 exchange transaction. However, the seller should be aware of some deadlines and potential “bumps in the road” as well.
What Is A Forward 1031 Exchange?
A forward 1031 exchange completes the close on the relinquished property before acquiring the replacement property. This method and a simultaneous 1031 exchange, where both properties are closed at the same time, are the two most common 1031 exchange methods (the third is a reverse 1031 exchange). A forward 1031 exchange is also sometimes called a “Like-Kind Exchange,” “Starker Exchange,” or “Delayed Exchange.” All the 1031 exchange deadlines and rules still apply with a forward 1031 exchange. A qualified intermediary (QI) has the same role in a forward 1031 exchange as in other 1031 exchanges. As with the other 1031 exchanges, a forward 1031 includes the same great tax deferral benefits.
Does A 1031 Exchange Free Up Passive Losses?
A passive loss occurs from a capital loss, or selling a property for less than you paid for it. The only time it is possible for an investor to utilize their Passive Activity Losses (PALs) is during a 1031 exchange. A PAL is one of two types of losses that can arise from owning investment property. The other type of loss is a Net Operating Loss (NOL). A NOL occurs when expenses of the operation of a property exceed the income.
What Is The 1031 Exchange Form 8824, And How Do I Fill It Out?
IRS Form 8824 is used to report a 1031 exchange for the tax year in which you complete it. Execution of the form calculates the amount of gain deferred due to a like-kind exchange of property. The IRS considers the deal completed in the tax year that you sell the initial relinquished property, and the exchange period begins. If the replacement process is not fully consummated until the following tax year, then the Form 8824 will not be final until that process is complete, which may require leeway in tax reporting deadlines. If you do not finalize the replacement purchase or purchases until the next tax year, you will need to request an extension for tax filing due to that circumstance.
1031 Exchange Property Types: What Are Considered Like-Kind Properties?
When a real estate investor sells a property, they might be eligible for a deferment of capital gains taxes through a 1031 Exchange if they purchase a replacement property called a like-kind property.
Can You Buy Out An LLC Or Partnership In A 1031 Exchange?
Partnerships can be an efficient way for multiple investors to purchase commercial real estate. Combining capital often helps investors buy commercial assets that would be beyond their reach as individual investors.
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