Tenant-In-Common (TIC)
Capital Gains Tax
One of the reasons people choose to use a 1031 exchange is to defer paying capital gains tax on their business or investment real estate. Capital gains tax is defined as the tax levied on profits from the sale of capital assets. Section 1031 of the Internal Revenue Code provides for the deferral of capital gains taxes with a tax-deferred exchange. A tax-deferred exchange or a like-kind exchange is a method by which a real property owner can sell his property and then reinvest the proceeds in ownership of like-kind property and defer the capital gains tax. The process gives the 1031 exchanger more buying power because the capital gains taxes are deferred. Capital gains taxes on the sale of the property are deferred until the like-kind property is sold at a future date. However, this information is not intended to replace qualified legal and/or tax advice regarding capital gains taxes. Each buyer should review any investment or transaction with their own legal and/or tax counsel to determine the amount of capital gains they owe. To qualify as a like-kind exchange and avoid capital gains taxes, property exchanges must be done in accordance with the rules set forth in the tax code and in the treasury regulations. In order to defer all capital gains tax in a like-kind exchange, the real estate buyer should follow these guidelines:- The exchange proceeds must be reinvested in the acquired property and the acquired property must have the same or greater value.
- Obtain equal or greater equity in the replacement property.
- Obtain equal or greater debt in the replacement property or have a reduction in debt that is offset with additional cash at closing from the taxpayer.
- Receive nothing except like-kind property.