Maryland 1031 Exchanges

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Maryland 1031 Exchanges

A 1031 exchange is a valuable tool under the IRS tax code. It allows real estate investors to expand their portfolios and defer capital gains taxes when reinvesting in new properties. By using proceeds from the sale of one investment property to purchase another “like-kind” property, investors can save significantly while building wealth.

However, 1031 exchanges have complex rules and strict timelines, making working with qualified intermediaries (QIs) essential to ensure compliance and a smooth transaction.

What Are the IRS Rules for 1031 Exchanges?

To qualify for a 1031 exchange, the IRS requires strict adherence to specific rules, including:

• Like-Kind Requirement: Exchanged properties must be “like-kind” in nature or character.
• Investment-Only Properties: Only investment properties qualify; primary residences are excluded.
• Market Value: The market value of the replacement property must meet or exceed that of the relinquished property.
• Use of Proceeds: All proceeds from the sale must go toward purchasing the replacement property, with no additional cash, property improvements, or debt relief included.
• Disqualified Parties: Exchanges between family members or close personal connections are prohibited.

Qualifying like-kind exchanges cover a range of real estate categories, including commercial buildings, vacant land, and various types of industrial properties. The IRS also imposes requirements on replacement property identification:

• Three-Property Rule: Identify up to three potential properties, regardless of total value.
• 200-Percent Rule: Identify multiple properties whose combined value is less than 200% of the relinquished property’s value.
• 95-Percent Rule: Identify multiple properties and acquire at least 95% of the aggregate value of those properties.

What Is the Process for Completing a 1031 Exchange?

A 1031 exchange enables real estate investors to defer capital gains taxes when reinvesting in like-kind properties. To complete a 1031 exchange, the IRS requires these steps:

• Sale of Relinquished Property: Only investment properties qualify, and primary residences cannot be used.
• Hiring a Qualified Intermediary: Sellers cannot handle exchange funds directly and must work with a QI to manage these funds throughout the process.
• Replacement Property Identification: Sellers must identify up to three replacement properties within 45 days of sale and provide details to the QI.
• Replacement Property Purchase: The replacement property must be purchased within 180 days of the sale, with funds transferred by the QI.

The IRS requires notification of the exchange using Form 8824, which is filed with your federal tax return.

What Properties Do Not Qualify for a 1031 Exchange?

Certain properties are excluded from 1031 exchanges, including:

• Personal Residences: Only investment properties qualify.
• Resale Properties: Real estate intended for quick resale, or “flipping,” is disqualified.
• Inventory Properties: Properties held as stock or inventory, such as real estate developments intended for sale.
• Foreign Properties: Properties located outside the United States.

Additionally, a 1031 exchange may be denied if the property is sold soon after acquisition. To qualify, the property must be held strictly for investment purposes, with proof of the intended use.

How Can Oliveri & Larsen Help Me With a 1031 Exchange?

Oliveri & Larsen provides essential guidance to ensure the exchange process is smooth, compliant, and financially beneficial. With in-depth understanding and experience, Oliveri & Larsen’s team offers the following services:

• Exchange Structuring: Coordinating the transaction structure to meet IRS standards.
• Document Preparation: Drafting and managing all necessary documents for the sale and purchase.
• QI Services: Providing escrow or title instructions, holding funds securely, and facilitating a smooth exchange.
• Compliance and Recordkeeping: Maintaining thorough records, including filing all IRS-required forms and issuing 1099s.

Contact Oliveri & Larsen for Help With Your Maryland 1031 Exchange

Oliveri & Larsen offers strategic Maryland 1031 exchange services to investors looking to build wealth and defer taxes. To ensure success, call 410-295-3000 or contact us online to schedule a consultation. Located in Annapolis, we serve clients in Ocean City, Anne Arundel County, Baltimore County, Baltimore City, Calvert County, Harford County, Howard County, Queen Anne’s County, St. Mary’s County, Worcester County, Kent County, and the upper and lower Eastern Shores of Maryland.