Real Estate Update in Palo Alto & Los Altos

Can someone make improvements to the replacement property in order to reinvest all the sale proceeds?
Yes. This type of exchange is known as a construction or improvement exchange. To make this exchange work, someone other than the investor or business owner (usually the Qualified Intermediary) must take title to the replacement property, make the improvements that were identified within the 45-day period, and convey the title to the exchanger within the 180-day period. Without planning ahead, this is a very difficult exchange to complete within the timeframe.

Can someone eventually use the replacement property as a primary residence or vacation home?
Yes, but they must meet the holding requirements prior to converting the property into a primary residence or a vacation home. Based on proposed regulations and case law, the minimum holding period is one year. However, most tax professionals feel that if the property shows up as a rental or for business use on two or more consecutive tax returns, the investor or business owner has shown intent to use the replacement property for rental or business use.

How should a 1031 exchange be reported to the IRS?
A 1031 exchange is reported on the IRS form 1099S, which should indicate that the investor or business owner is completing a 1031 exchange*. Then, form 8824 must be completed as part of the annual federal income tax return.

Is it too late to initiate a 1031 exchange if the agreement of sale was already signed?
No, as long as the closing on the property has not occurred. However, once the closing occurs, it is too late to take advantage of a 1031 exchange. If necessary, 1031 Accommodators, LLC can prepare the appropriate documents for a 1031 exchange on the same day as the closing, although 1 week prior to closing is preferred.

How much does someone have to spend in order to defer all of the capital gains?
The replacement property one wishes to acquire must have a value equal to, or greater than, the relinquished property(s). Then all proceeds from the sale must be reinvested into the replacement property(s).
For Example: An investor sells a piece of property for $1 million. Out of that, $500,000 went to pay off a mortgage and the other $500,000 went to a Qualified Intermediary to be put towards a new property. In order to defer all capital gains, the investor must purchase replacement property(s) with a total value of $1 million or more. If the investor decides to purchase a property worth $500,000, then he or she will be taxed on the other $500,000, since paying off a mortgage is considered to be the same as receiving cash from the sale of the property.