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Mark Malachowski
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870 Market Street
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San Francisco, CA 94102

(415) 983-0717


 

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San Francisco Estate, Business, and Investor Immigration Law Blog

1031 Exchange Deadline

 

If you just sold real property and want to do a 1031 exchange to avoid capital gain, you are at the “now or never” stage to elect for funds to go to a 1031 Accommodator. Here is the deal in broad strokes:
(1) all tax basis will be allocated to the funds to be reinvested via 1031, so any funds taken as cash will be fully taxable at Federal capital gains and State ordinary income rates — a total approaching 25%, though perhaps the state taxes are a deduction against Federal taxes, which may bring the effective rate more into the 22% range.
(2) You will have a maximum of 45 days after escrow closes to “identify” potential replacement properties. You can identify a total of three or, alternatively, as many as he wants but the total value may not exceed 2X his 1031 funds with Accommodator. So, you could identify a few higher-value properties (a nice vineyard or office rental building) or many lower-value properties, such as rental homes in the San Joaquin Valley or maybe Idaho. It is called a “like-kind” exchange, but all real property is considered “like-kind” to all other as far as I know. You must keep in the money in the U.S. — no villas in Tuscany.
(3) You will have six months from when escrow closes to close on one or more “target” properties.
(4) If you want to leverage, you can add loan monies to the 1031 monies. The leveraging with mortgage money will serve to give you significant tax basis to depreciate, sheltering some money.
Thus, if you are looking at lots of capital gain tax and a 1031 could mitigate the hit, and you will probably invest the funds somewhere, so why not do so in real estate instead of losing 22% or more to the government?