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My husband and I own two condos in Florida that we are getting ready to sell. Should we do a 1031 tax exchange?
Marcy S. in Farfield, NJ asks:
My husband and I own two condos in Florida that we are getting ready to sell. Should we do a 1031 tax exchange? If so, do we need to purchase 2 more rental condos?
Marcy, as you know, A 1031 tax deferred exchange allows you to roll-over all of the proceeds received from the sale of an investment property into the purchase of one or more other like-kind investment properties. At closing, proceeds are transferred to a third party who holds them until they are used to acquire the new property. I would definitely consider it if you are going to show a substantial gain on the sales. With a 1031 exchange, capital gains taxes are deferred if all of the exchange funds are used to purchase "like-kind" investment property.
As far as the definition of "like-kind", the IRS states "In a like-kind exchange, both the property you give up and the property you receive must be held by you for investment or for productive use in your trade or business." This is generally interpreted to mean that you can exchange a single property for multiple investment properties, or purchase one property from the proceeds of several. As long as the new property is for investment purposes, they do not need to be condos. Proceeds not used to purchase new investment property are taxed as a cash sale. Please seek advice from your tax advisor to get all the prudent details.
Stephen
If you have a question that you would like me to answer please email me at Stephen@katzmortgageteam.com.
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