Funds To Reinvest
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Funds To Reinvest
In general, in order to defer 100% of the tax liability by utilizing the 1031 Exchange, the taxpayer must comply with specific reinvestment requirements. These requirements are:
The exchangor must purchase one or more properties which add up to equal or greater value of the net selling price of the property relinquished. They ALSO must reinvest all of the net cash received from the sale of relinquished property.
The exchangor can always replace debt with cash, but cannot replace cash with debt without incurring boot. If the exchangor pulls out any cash from the sale, it is liable to taxes.
If the exchangor decides to purchase for less or pull-out boot in the exchange process, a partial 1031 Exchange is still an option. The funds not reinvested will be considered boot, and liable for taxes.
Selling Expenses
The taxpayer may use 1031 Exchange funds to pay for customary expenses involved with the sale and purchase of property(s) involved in the exchange. See below for some examples of permissible expenses.
Non-permissible selling expenses are costs that are not directly related to the sale of the relinquished property or purchase of replacement property. See below for some examples of non-permissible expenses.
It is important to carefully review all closing costs associated with the sale of property to ensure that exchange funds are only used towards permissible expenses. We always recommend that the taxpayer consult with their tax advisor to ensure that you are following all applicable regulations.
Access To Funds
During the 1031 Exchange process, the taxpayer cannot directly access the funds during the 1031 Exchange process. The IRS requires that the funds be held by a qualified intermediary, such as GB 1031, until they are used to acquire the replacement property. This is required by the IRS to ensure that the funds are not used for purposes other than the 1031 Exchange.
If the taxpayer attempts to access the funds themselves, or have any constructive receipt of the exchange funds, a taxable event will have been triggered and could result in a significant tax liability.
Gibraltar 1031 Exchange will safely and securely hold the funds in a segregated bank account and will only disperse the funds for use in the taxpayers 1031 Exchange purchase. GB 1031 will keep the taxpayer updated on the status of the exchange and provide the documentation the taxpayer will use when filing their taxes and keep for future records. GB 1031 will always provide the taxpayer peace of mind that the funds are held safely and securely.
