How to Eliminate Capital Gains on the Sale of Real Estate

Eliminate real estate capital gains.

There's one thing investors want more of: profit. This is certainly the case in real estate. A real estate sale can create a huge profit that also creates a huge tax liability, or capital gain, on that profit. Section 1031 of the U.S. Internal Revenue Code allows investors to defer capital gains taxes in real estate by following a few rules.

Things You'll Need

• Qualified Intermediary (QI)

Instructions

1. Review the benefits of a Section 1031 exchange. This rule allows investors to defer capital gains on the sale of like-kind real estate. That is, the next purchase of real estate must be the same or similar, with a good rule of thumb being within 10 percent of the sale price of the relinquished property. Your QI will help determine your limitations.

2. Find a replacement property to purchase with the proceeds of the sale.

3. Locate a Qualified Intermediary (broker) to act as a safe harbor for proceeds during the transfer process. Contact your local bar association or real estate agent for a reference.

4. Transfer the relinquished (sold) property. The QI will acquire the relinquished property and transfer it to the buyer. This prevents the taxpayer from having a receipt of funds.

5. Transfer the replacement (purchased) property, using the QI to move the purchased property to the taxpayer. The exchange ends the moment the taxpayer takes receipt of the proceeds of the sale.

Tips & Warnings

• A taxpayer has 45 days after the date the sold property is transferred to find a new property. The exchange must be finished within 180 days after the transfer of the sold property.

References

• Realtor: Field Guide to 1031 Exchanges
• FEA: Section 1031 Exchanges: