Investors who are looking for tax-deferral strategies can potentially rely on 1031 Exchanges, allowing them to preserve their equity while also offering the possibility of passive income and enhanced diversification. While 1031 Exchanges apply tax deferrals at both state and federal levels, each state may have its own rules that you must take into account to ensure that your transaction remains compliant.
Are there any Florida 1031 Exchange rules worth knowing about? Yes, and the answer is more complex than it seems, given how the state doesn’t levy income tax. Realized 1031 shares what you need to know in this insightful article.
Minimum Federal Requirements
Florida conforms to the framework created by Section 1031 of the Revenue Code. For investors conducting a successful exchange involving Florida properties, the swap won’t be recognized as an official sale. As such, you defer capital gains taxes until a taxable event occurs. This delay in tax liability helps you preserve more of your capital and enter sectors or asset classes that are more suitable for your long-term financial goals.
However, to successfully execute the exchange and remain eligible for tax-deferral benefits, there are a few requirements you must comply with.
- Like-Kind Property Only: You can only exchange two properties that are like-kind in nature. In other words, both relinquished and replacement assets must have been held for business or investment use. Primary residences are not allowed.
- Deadlines: The entirety of the exchange must occur within 180 days, or you’ll lose the tax-deferral status. Within the 180-day timeline is a 45-day identification period, which begins the day after the sale of relinquished property closes.
- Reinvestment of All Proceeds: All proceeds from the sale must be reinvested when acquiring the replacement asset. If you receive any non-like-kind property, such as leftover cash or mortgage relief, then this is considered a taxable boot on a federal level.
- No Direct Control of Funds: You cannot have direct control of the funds, as this would result in a constructive receipt and official sale. Instead, you’ll need to engage with a qualified intermediary who will hold the funds in escrow.
Second or Vacation Homes
In Florida, there are a large number of secondary or vacation homes leased seasonally or as Airbnbs. There are around 845,000 to a million units, depending on definitions. As such, there’s a high tendency for investors to attempt to exchange these properties for 1031 Exchanges.
Florida doesn’t have specific rules for such asset classes. Instead, we must look at federal rules, particularly Revenue Procedure 2008-16. These provisions create safe harbor requirements that allow Florida vacation homes to qualify as like-kind property instead of personal-use assets.
- You must own the property for at least 24 months immediately before the exchange.
- You must rent the dwelling unit to another person at a fair market rental rate for at least 14 days within the two-year ownership period.
- In each of those same 12-month segments, your personal use of the property cannot exceed 14 days or 10% of the of the total number of days the unit is rented out.
Once your second or vacation home satisfies these requirements, then it is eligible for 1031 Exchanges.
State-Specific Florida Like-Kind Exchange Requirements
In the discussion of Florida 1031 compliance guidelines, state-specific rules for the swap are basically nonexistent since there’s no income tax or capital gains tax. Instead, there are a few broader tax rules that will affect the exchange.
Documentary Tax Stamp
Florida imposes a documentary stamp tax for all transfers of real estate, and the payment is due after the sale of the relinquished property and after the acquisition of the replacement asset. Most counties charge $0.70 per $100 in property value. This closing cost must be taken into account before conducting the swap, as the deductions will affect the final sales proceeds and how much you can reinvest.
County-Specific Regulations
Each Florida county has distinct and evolving rules for short-term rentals. These can affect compliance with Revenue Procedure 2008-16. As such, it’s important to work with CPAs or financial advisors who are familiar with these ever-changing regulations. That way, you avoid attempting to exchange an asset that doesn’t qualify in the first place.
Wrapping Up: 1031 Tax Deferral Florida Rules and Considerations
Exchanging in Florida tends to be much more straightforward since the state doesn’t have income taxes. Federal processes apply, but without the complications added by specific 1031 exchange regulations for Florida. The broader tax rules — such as the documentary stamp tax — are what you need to consider, since these affect reinvestment amounts, amongst other implications. Always make sure to consult with experienced 1031 Exchange advisors or CPAs to confidently navigate these Florida 1031 compliance guidelines.
