Sell investment property...pay NO taxes? Is a 1031 Tax Exchange for you?

When Mrs. Smith called me today, and after about an hour on the phone, I thought maybe this was a good topic for the blog. She’s owned a property in CA (valued at around $700,000) that she has rented for many years and feels it is time to sell. Of course, paying a high tax bill on the $600,000 that is left after paying off the mortgage owed is not a desire. So the discussion revolved around doing what is known as a “1031 Tax Exchange”. As we discussed further it was determined that what she wants to do will probably work. That is, take the 600k and purchase 2 properties with the cash and rent both. Now the tricky part…she wants to close the sale in a month and she hasn’t really started on the process of finding the 2 to buy. She also mentioned that she feels she can handle all the exchange ‘stuff’ herself. Now, I’m no expert, however the following is what I shared with her from my limited knowledge.
• Must use a 1031 tax exchange facilitator, that handles the closing and receives the funds from the sale (deposits the $$ into a trust fund to await the close of the 2 purchases). If the seller gets the money deposited in their bank, the exchange is void and guess what? The tax man gets his.
• Can go ahead and close the sale as long as the Purchase agreement discloses the exchange.
• 45 day window (from the close date) to name the replacement properties (the ones Mrs. Smith wants to buy)
• 180 days to actually close on both properties.
• Any extra fund left over after the close…yep…the tax man gets his share of that amount.

Now there’s more to this than what’s mentioned here, and for more precise info on this subject

1031 ECI

I highly recommend.

Now is Washington a good place to invest in real estate after selling the same in another state? Mrs. Smith thinks so, and after reviewing the appreciation rates for 2006 today (more to come on that at another date) she can’t wait to get the ‘declining’ property sold and reinvested here in our area.

I can’t say I blame her.

photo courtesy of www.patriotnetwork.info