Defer Capital Gains without 1031 exchange?

Question

I am closing escrow next week on the sale of a rental property that I have owned for several years: can I avoid capital gains by reinvesting locally (Ca.) or did I blow it by not going 1031?

Dave Foster · Answer

We like all parties to be notified at closing so we include a notification and signature page for the escrow officer that goes in the client file.   That way there are plenty of witnesses to process and intent should it ever be questioned.

But it is indeed much simpler than back in the day.  How could that be when ordering coffee has become more complicated???

Jay Hinrichs · Answer

@Dave Foster

thanks... I guess it does not matter if your transaction never gets looked at.

I just recall the one's I did or was party too.. it was in the listing agreement it was in the purchase contract.. and with this one... it sounds like it would be an addendum to the contract changing vesting.. and if uncle looked it they may think there was not the intention form the beginning of marketing the property and then disallow it.. but again.. most of these I did back in the day... and I just recall that's how we did it...

Dave Foster · Answer

@Jay Hinrichs

You're right, there used to be a lot of confusion because so many buyers didn't know what a 1031 was that they were scared of a seller doing one- wondering how it would negatively impact them.  Technically speaking the 1031 is merely an assignment of contract rights to the intermediary and we specify that the deed pass directly from seller to buyer.  So all that is really needed is a contract that is assignable.  Honestly most of our clients prefer that since they feel that it's no ones business but their's whether they're doing a 1031 or not.

Now that 1031s have become so popular most standard board contracts actually have language specifying cooperation with a seller (or buyer) if they are doing a 1031 exchange.

Jay Hinrichs · Answer

@Dave Foster

I was thinking that one needed to expressly denote in the listing agreement that the sale was subject to a 1031 at sellers expense.. and that you could not just a few days before the closing change tac and decide to 1031.. but I may be wrong.. much of what I know was learned so many years ago.. LOL

Leslie Pappas · Answer

you can absolutely still exchange, as long as this was a property held fo investment, but you need to move quickly.  Please call if you need help.

Dave Foster · Answer

Hi @Tony  Reynolds

The answers to your questions are no and no.  When you sell a piece of investment property you will recognize a gain and incur tax on the profits unless you use a 1031 exchange.  Where you reinvest is irrelevant.

However you have not yet blown anything.  You can still put a 1031 in place.  The exchange must be in place at the closing and you still have some time.

From the day that you close you have 45 days to identify your potential properties and 180 days to close.  For many those timelines cause concern over their ability to find the best replacement property.  However in an active market it might be well worth your effort to attempt it.  Your only risk in something like this is that you will still pay the tax and your loss will be the exchange fee.  And since the exchange fee is a deductible expense against the property you really don't lose all of it.

Your time is running short.  Give me a holler if I can answer any other questions for you.

Samuel DeMass · Answer

@Tony  Reynolds,

I don't know beyond a reasonable doubt, but I think the requirements to avoid capital gains are very specifically related to 1031 exchanges.

Having never done one, I can't speak to it, but I've read enough to know that the handling of the funds is important from one transaction to the next.

This is something I would definitely be talking to a RE attorney about, like tomorrow.

As a side note, would the buyer be willing to renegotiate closing date to give you time to set up the 1031 exchange logistics?

Good luck.  Keep us updated on your progress!