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A friend of mine just sold his apartment building, in Massachusetts,

for 1,000,000.00. His capital...
A friend of mine just sold his apartment building, in Massachusetts, for 1,000,000.00. His capital gains amounts to approx 460,000.00.

The questions are, 1) How long does he have to invest the 460K before he gets hit with capital gains taxes? 2) Does he have to invest the total 460K or can he use some of the money to live on in the interim? 3) Can he invest this money in another state?
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Answered in 15 minutes by:
4/21/2013
Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 12,867
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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NPVAdvisor :

HI

Customer:

Hi. How are kyou?

NPVAdvisor :

It sounds like you may be asking about a 1031 exchange, where he can reinvest in a (like-kind) property and defer that capital gains

Customer:

Exactly

NPVAdvisor :

Well, and yuo?

Customer:

Good thanks

NPVAdvisor :

OK havg on just a sec and I'll get the exact regs for you

Customer:

thank you

NPVAdvisor :

First, your questions about the time line ...

NPVAdvisor :

A taxpayer has 45 days after the date that the relinquished property is transferred to properly identify potential replacement properties. The exchange must be completed by the date that is 180 days after the transfer of the relinquished property, or the due date of the taxpayer's federal tax return for the year in which the relinquished property was transferred, whichever is earlier. Thus, for a calendar year taxpayer, the exchange period may be cut short for any exchange that begins after October 17th. However, the taxpayer can get the full 180 days, by obtaining an extension of the due date for filing the tax return.

NPVAdvisor :

Also, very importanct is this ...

NPVAdvisor :

The IRS regulations are very clear. The taxpayer may not receive the proceeds or take constructive receipt of the funds in any way, without disqualifying the exchange.

NPVAdvisor :

there has to be what's called a qualified intermediary

NPVAdvisor :

A Qualified Intermediary is an independent party who facilitates tax-deferred exchanges pursuant to Section 1031 of the Internal Revenue Code. The QI cannot be the taxpayer or a disqualified person.



  • Acting under a written agreement with the taxpayer, the QI acquires the relinquished property and transfers it to the buyer.

  • The QI holds the sales proceeds, to prevent the taxpayer from having actual or constructive receipt of the funds.

  • Finally, the QI acquires the replacement property and transfers it to the taxpayer to complete the exchange within the appropriate time limits.

NPVAdvisor :

.

NPVAdvisor :

Here's the actual guidance from IRS

Customer:

I will show thius to him. If I have any more wuestions I will get back to you.

Customer:

Thank you.

NPVAdvisor :

One more things here are the actual qualifications, listed in readable language

NPVAdvisor :

What are the requirements for a valid exchange?



  • Qualifying Property - Certain types of property are specifically excluded from Section 1031 treatment: property held primarily for sale; inventories; stocks, bonds or notes; other securities or evidences of indebtedness; interests in a partnership; certificates of trusts or beneficial interest; and choses in action. In general, if property is not specifically excluded, it can qualify for tax-deferred treatment.

  • Proper Purpose - Both the relinquished property and replacement property must be held for productive use in a trade or business or for investment. Property acquired for immediate resale will not qualify. The taxpayer's personal residence will not qualify.

  • Like Kind - Replacement property acquired in an exchange must be "like-kind" to the property being relinquished. All qualifying real property located in the United States is like-kind. Personal property that is relinquished must be either like-kind or like-class to the personal property which is acquired. Property located outside the United States is not like-kind to property located in the United States.

  • Exchange Requirement - The relinquished property must be exchanged for other property, rather than sold for cash and using the proceeds to buy the replacement property. Most deferred exchanges are facilitated by Qualified Intermediaries, who assist the taxpayer in meeting the requirements of Section 1031.

NPVAdvisor :

You're welcome .... feel free to bookmark this to come back for reference

NPVAdvisor :

the links will stay acive

NPVAdvisor :

If this HAS given you enough information, I would appreciate either an “accept” or a feedback rating of 3 (OK) or better. That's the only way they will pay us here. HOWEVER, if you need more on this, PLEASE COME BACK here, so you won't be charged for another question.

Customer:

thanks


 


Joe

Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 12,867
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Lane and 87 other Tax Specialists are ready to help you
Ask your own question now

Hi Joe,

Just following up to see if you had any follow-up questions.

Here' an excellent site with Answers to Frequently Asked Questions about 1031 exchanges.

http://www.1031.org/about1031/faq.htm




Lane

I would appreciate either an “accept” or a feedback rating of 3 (OK) or better. That's the only way they will pay us here.

HOWEVER, if you need more on this, PLEASE COME BACK here, so you won't be charged for another question.
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Lane
Lane
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Category: Tax
Satisfied Customers: 12,867
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