A 1031 exchange may provide real estate investors in the California area with the ability to legally defer capital gains taxes on the sale of investment property. However, there are a great deal of strict rules and regulations to follow regarding the reinvestment of the net proceeds of the sale. That being stated, if the seller fails to strictly follow those rules, a portion of the capital gain or even the entire capital gain may very well become taxable. If that occurs, it goes against the entire point of conducting the 1031 tax deferred exchange in the first place.
Furthermore, the tax penalty of a failed 1031 exchange is typically 30% and is seldom a burden than can easily be absorbed by most taxpayers. We view a 30% tax rate to be significant to say the least and worth delaying. The good news is that a 1031 transaction is not actually the best way to defer capital gains taxes on real estate sales. In fact, there is a far superior solution with rules that are significantly easier to follow. The main reason why many 1031 transactions fail is due to the fact that you need to quickly find a replacement property or properties to purchase.
Based on section 1031 of the tax code, you are required to identify a possible replacement property or properties within forty-five (45) days after the close of escrow. This is not always possible. For example, you may not want to spend your valuable time and make the effort searching for properties to purchase until you know that the property you are selling actually sells. Just because it is under contract does not mean the sale will go though. A plethora of real estate transactions fail to close after a Purchase and Sales agreement has been fully executed.
That means if you wait to close on the sale before starting the replacement property search phase, you only have forty-five (45) days to make a humongous decision regarding the property or properties you wish to purchase. It simply does not make sense to rush such an important investment. You deserve the time that it takes to properly search for the best real estate deals that will truly serve your needs now and in the future. In addition to the time that it takes for property tours, it takes time to perform your initial due diligence prior to making an actual offer.
The current economic shutdown has made scouting properties and performing due diligence almost impossible. Failing 1031 exchanges are at crisis levels for commercial property owners. Deals in progress on the sale of investment real estate assets are at risk of failing with no options for re-investment. A failing 1031 exchange transaction can be saved with an Installment Sale of the 1031 Account balance.
You do not need to take part in a 1031 transaction in order to defer capital gains tax when selling your real 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 structure that is far more effective than a complicated 1031 transaction. 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.