A plethora of real estate investors/Sellers turn to 1031 exchanges in order to defer paying the capital gains taxes that are owed when selling investment properties at a profit. That being stated, these types of transactions often fail due to the fact that rules and regulations as set forth by the Internal Revenue Service (IRS) tax code are difficult to abide by. For example, if you sell an investment property in the state of California, you must identify a replacement property within forty-five (45) days from the sale of that property. Also, 1031 only apply to investment real estate not highly appreciated primary residences and second homes which have not been rented out.
In addition, you must close on the purchase of the replacement property within 180 days of the sale of the original property. It can be a bit difficult to close on a residential real estate transaction from start to finish with those parameters in place. It becomes even more difficult with commercial and industrial property. This is why a high percentage of 1031 exchanges fail. The bottom line is that the seller simply cannot comply with these restrictions or decides that they do not want to tie up their money in another intensive management real estate related investment.
At this point, the real estate investor may choose to take the proceeds from the sale in a lump sum. However, that completely defies the purposes of entering into a 1031 exchange in the first place. That purpose of course is to defer the capital gains tax payment.
There is another choice that can provide all appreciated real estate Sellers with liquid assets, and still satisfy the deferment of capital gains taxes. Welcome to the wonderful world of the installment sale. The internal revenue code section 453 Installment Sale method provides yearly income to real estate Seller that are selling appreciated assets instead of distributing the proceeds from the sale in one large lump sum, the Seller gets tax deferral via spreading the payments out over numerous years.
For example, the seller receives the proceeds over a period of time that the seller chooses. The seller is taxed from the date of the sales transaction, but in subsequent years as the proceeds from the sale are actually received. The bottom line is that the installment sale method spreads out the capital gains tax over time and provides the seller with the ability to gain liquid assets on a scheduled basis, which may also reduce his overall tax impact, and Seller advantageously also get to receive back his original cost basis plus costs of improvements income tax free. It is perfectly legal and well recognized principal of deferring tax payments. It is also the perfect way to save and rescue a failing 1031 exchange or as a 1031 alternative which applies to personal types of real estate as well. Delaying taxes is a commonsense means to potentially increasing one’s net worth by receiving more income over the course of a time period because you are using what would ordinarily be a negative tax liability now as an asset to increase income stream.
In conclusion, real estate investors/Sellers in the state of California do not need to take part in a 1031 transaction in order to defer capital gains tax when selling their appreciated eal estate for profit. There is a solution that is far more cost effective and a whole lot less stringent. Please contact Tax Deferred Sales today. TDS has specifically developed a proprietary tax expertise Installment Sale transaction structure that is far more effective than a complicated 1031 transaction and often viewed as a better alternative applying to more types of personal real estate.
Our team of experts specializes in providing customized strategies that delay tax impact. TDS takes great pride in assisting sellers of appreciated assets in deferring the capital gains tax that greatly enhances the ability to grow your net worth. Our company was founded by a LLM tax attorney with over 20 years tax deferral experience and expertise with a singular focus on assuring sellers delay of taxation.