 Pinehurst NC is a great place to buy 1031 Property. Our Realtors can help you find the perfect Investment Property in Pinehurst, Southern Pines or one of the other surrounding communities in North Carolina, including vacant land, Pinehurst Condos, rental houses, commercial property, etc. in Moore County.
1031 Basics
Here are the basics when it comes to Pinehurst NC 1031 Exchanges or Exchanges anywhere for that matter. Keep in mind that this is a summary. Your individual situation will require specialized knowledge and experience that this page is not designed to address. At McDevitt Sotheby's International Realty, we can answer most very specific questions; and if we can't, we will refer you to someone who can.
Key Terms in 1031 Like Kind Exchanges
- Relinquished Property the property that you sell in a 1031 Exchange.
- Replacement Property the property that you acquire in a 1031 Exchange.
- Identification Period the 45 days following the sale of your Relinquished Property during which you must identify (in writing) the property or properties that will be your Replacement Property.
- Replacement Period the 180 days following the sale of your Relinquished Property and the time period that you have to acquire Replacement Property.
- Basis this is the amount that you pay for property (including acquisition costs), less any depreciation that you take on the property between the time you purchase the property and the time you sell it, plus any capital improvements that you make to the property while you owned it. In general, the difference between the price at which you sell property and your Basis (after it is Adjusted) is your profit or your Capital Gain. There are other things that affect your Basis; and if you are a good record keeper, your accountant can compute your Adjusted Basis accurately.
- Qualified Intermediary the entity that coordinates your 1031 Exchange and holds the proceeds of the sale of your Relinquished Property until you are ready to acquire your Replacement Property.
A Simple Example 1031 Like Kind Exchange
You own a rental house in Pinehurst that you purchased in the 1990's for $100,000 (including the cost of acquisition) and you have depreciated it down to $70,000. You added a garage to the house this year at a cost of $25,000. You are getting ready to sell the property for $200,000. If you sell at that price, you will have a profit of $105,000 ($200,000 - $70,000 - $25,000 = $105,000). You will have a capital gain on the profit of $105,000. If you opt for a 1031 Exchange and use the sale proceeds to purchase another investment property or a property used for business, you may be able to defer the capital gains taxes.
At the closing of the rental house (the Relinquished Property), the sale proceeds are paid to a Qualified Intermediary (QI) on your behalf. The QI prepares the Exchange Documents for you to sign prior to the closing. After the closing of the sale of the Relinquished Property, you have 45 days to identify one or more Replacement Property(ies). This 45 day period is known as the Identification Period. In order to defer all of capital gains, you must use the sale proceeds to purchase one or more Replacement Properties that equal or exceed $200,000. There may also be a maximum amount that you must observe when choosing a Replacement Property. In order to complete the 1031 Exchange, you must purchase the Replacement Property within the Replacement Period, which expires 180 days after the date of the sale of your Relinquished Property.
The First Step
Before the Sale of the Relinquished Property , make arrangements with a Qualified Intermediary to coordinate your 1031 Exchange. Consult with your real estate attorney, real estate broker and accountant before choosing a Qualified Intermediary. In the Pinehurst North Carolina area, there are several reputable QI Companies and numerous real estate attorneys who can assist you. Once you have a closing date scheduled for the sale of your Relinquished Property, here is an example time line of what happens next . . .
Sample 1031 Timeline
- Day 1 the closing date for the sale of the Relinquished Property.
- Day 45 the deadline to identify potential Replacement Properties by submitting a written list to the Qualified Intermediary. It is important to remember that you cannot change this list or add properties after Day 45. Day 45 means Day 45 even if it is a weekend or holiday. You can only complete your 1031 by purchasing Replacement Property on this list.
- Day 180 the deadline to actually purchase Replacement Property or properties. This means that you must CLOSE on the purchase of the Replacement Property within 180 days of the sale of your Relinquished Property.
- CAREFUL if your tax filing deadline falls before 180 expires, the deadline for the closing of your Replacement Property may be shorted. Your Accountant can probably address this by filing an Extension but again, ASK YOUR ACCOUNTANT to make sure.
Do's and Don'ts
- Do Not try a 1031 Exchange on your own get advice from your real estate broker, real estate attorney and accountant.
- Do Not wait until you sell your Relinquished Property to set up a 1031. It will be too late at that point.
- Do Not schedule closings or plan to meet deadlines on the day before a deadline.
- Do consult with an attorney who specializes in real estate law before selling your Relinquished Property.
- Do consult with an Accountant or a professional tax advisor (not a tax preparer) before selling your Relinquished Property.
- Do advise your Real Estate Broker that you intend to complete a 1031 Exchange with the proceeds of the sale of your Relinquished Property. If your real estate broker is not familiar with the 1031 process, get a new broker.
- Do consult with your Accountant to make sure that you file the appropriate returns and other forms to document your 1031 Exchange in a timely fashion.
Property that Does Qualify as 1031 Property
- Raw Land
- Apartment Buildings
- Rental Condos
- Rental Property
- Office Buildings that you rent
- Property that you use in your own business, like your office building or a warehouse for the products that you sell
- Inherited Property, as long as it is held for investment or use in your business
Property that Does NOT Qualify as 1031 Property
- Vacation Property that you use for personal use more than 14 days a year (See the Rule below about personal use)
- Your Primary Residence
- Any Property that is not held for Investment or for use in your trade or business
Rules About Personal Use of 1031 Property
If you use the property for 14 days or less per year or less than 10% of the days it is rented in a 365 day period, then the property may qualify as rental property that can be used as 1031 property.
The Bottom Line
It may be worth considering a 1031 Like Kind Exchange if you property to have 1031 eligible property to sell. If you sell real estate that is used for business purposes or as an investment property, you may have capital gains tax on any profit that you make on the sale. If you meet certain requirements that are very generally summarized on this page, you may be able to use the money generated from your sale to acquire like kind property (another property used for business or investment) and defer the payment of federal and state capital gains taxes. By setting up a 1031 Like Kind Exchange, these taxes can be deferred until you sell the Replacement Property at a later date. This allows you to basically reinvest your profits directly into another more expensive property; and it is great way to build wealth as part of a long term real estate investment strategy. Some people integrate 1031 Exchanges into their estate planning strategies to pass their wealth on to subsequent generations.
Follow this link to the IRS website about 1031 Exchange Rules.
More specific information about 1031 Exchanges in Pinehurst NC or Southern Pines NC, please contact us at: (910) 693-7901 or (800) 788-8814 or by e-mail: noel.mcdevitt@sothebysrealty.com
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