Well, ‘tis the season, and another end of the year is suddenly upon us. I say “suddenly” because everyone I know is in utter disbelief that this year has gone by so fast and the busy holidays have snuck up on us. I know it’s kind of cliche to say so, but it’s really true. It’s been another challenging, but very good, year and we feel very fortunate to have had so much success. Thanks to all of our clients and employees for all of their hard work and loyalty.
By the way — 2022 will be Investors Title Company’s 50th anniversary, and we are very proud of all we’ve accomplished. In 2022, we will have some events to celebrate, but more on that after the first of the year.
A Note on 1031 Tax Exchanges
I won’t take a lot of your time with this article so you can get back to wrapping presents, but I wanted to touch on the basic rules for 1031 tax exchanges. We have closed a lot of deals in the last couple of years where the seller was doing a deferred exchange. So you may have a deal that involves this issue too.
A 1031 exchange is a real estate transaction that allows the owner/seller to defer paying capital gains tax if they sell a property and then purchase another property to “replace” the property that was sold, as long as they follow some rules set out by the IRS.
Keep in mind that properties sold and purchased have to be properties held for investment, so a principal residence does not qualify. There are different rules for primary residences.
Anyway, upon the sale of the first property, there is specific documentation that must be signed (which we have) that appoints ITC or someone else as an intermediary to hold the proceeds of the sale. The seller cannot take possession of those funds. Then within 45 days of the sale, the seller must identify a property or properties they plan to buy to replace the property they sold. (They don’t have a contract signed at this point, but must pick them out.)
Within 180 days of the first closing, they must close on one or more of the identified properties and use all of the proceeds of the first sale in the purchase, thereby deferring the capital gains tax to a later date.
Now keep in mind that what I have outlined is the basic set of rules. There are many other questions and issues that could come up during an exchange transaction that need to be addressed. Because of this, and because neither you nor myself are tax experts (unless, of course, you are, and in that case, congrats), I always recommend that anyone considering completing a 1031 exchange discuss it with their accountant or tax preparer first. The tax regulations are very technical and can be a minefield in which to navigate.
I hope everyone has a wonderful holiday season and a great start to 2022. Now I am off to risk life and limb with one last Christmas shopping excursion — wish me luck! If I don’t make it back alive, remember me fondly, and Merry Christmas.