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Control capital gains tax with 1031 exchange

On Behalf of | Sep 13, 2017 | Income Taxes

When individuals in Georgia buy and sell real estate or business assets, capital gains taxes could be a costly concern. Solutions could emerge with planning and patience because an Internal Revenue Code Section 1031 exchange or irrevocable trust provides the legal instrument for navigating around taxes under the right circumstances.

To accomplish a 1031 exchange, a person works with a qualified intermediary who holds the cash from the sale of the first property. The seller now has 45 days to locate another like-kind property . Because of the chance of deals falling through, the process requires a list of several potential properties for the purpose of a like-kind exchange. After this step, a person has another 180 days to purchase one of the properties and take possession of it. An impending due date for a tax return could push up this deadline.

If the party owning the new property resides at the location for at least two out of the last five years before selling it, then capital gains tax could be avoided. This strategy also depends on the income of the seller, which cannot exceed $250,000 for a single person.

An irrevocable trust presents another approach. After placing a business or property within the trust, money is distributed with an installment sale. The installment note gets canceled when the trust sells the property, but documentation must be executed precisely to avoid tax obligations. Someone wishing to investigate these strategies further could ask an attorney familiar with tax law to research the issue.