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How much time is allowed to reinvest money from a land sale before capital gains taxes apply

Bruce, SD |

I'm planning on selling farmland and purchasing more.

Attorney Answers 3

Posted

I believe you are talking about a section 1031 transaction. Such transactions are exchanges and not reinvestments. So, if you sell one property and receive the money, you must pay tax on the capital gain. If you are planning to reinvest the proceeds, you can work with a 1031 exchange agent. You give your property to the agent. The agent sells your property and then uses the proceeds to acquire another property. That second property is then exchanged back to you.

You must set up the 1031 transaction in advance. However, there are timeframes in which you can identify (45 days) and close (180 days) on the second property subsequent to the sale of the first property. I have provided a link a section of the IRS.gov website that discusses Like-Kind Exchanges. That link also refers you to IRS publication 544.

Structuring such a transaction requires advice. You can find 1031 intermediatires simply by Googling "1031 Exchange". Or, use a tax attorney experienced in doing the paperwork on such transactions.

Good luck.

Marty

Marty Davidoff, emd@taxattorneycpa.com, 732-274-1600. This answer is provided for general information only. You should seek advice from an attorney or tax professional.

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Posted

Mr Davidoff offers excellent insight into the rules in this area. The point is that you cannot just sell a property and then reinvest. You must either swap one real estate property for another "like kind" simultaneously or you can do a deferred like kind exchange. In the latter you must use a qualified intermediary who holds the proceeds of the sale of your property and then acquires the replacement property for you. There is also something called a "reverse like kind exchange" or Starker exchange which allows you to acquire the targeted real estate first and then sell your real estate. Do not even attempt to do this without a tax attorney assisting you as these rules are tricky and technical.

Hope this helps.

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Mr. Fromm is licensed to practice law throughout the state of PA with offices in Philadelphia and Montgomery Counties. He is authorized to handle IRS matters throughout the United States. His phone number is 215-735-2336 or his email address is sjfpc@comcast.net , his website for more tax, estate and business articles is www.sjfpc.com. and his blog is

LEGAL DISCLAIMER Mr. Fromm is licensed to practice law throughout the state of PA with offices in Philadelphia and Montgomery Counties. He is authorized to handle IRS matters throughout the United States. His phone number is 215-735-2336 or his email address is sjfpc@comcast.net , his website is www.sjfpc.com. and his blog is <http://frommtaxes.wordpress.com/> Mr. Fromm is ethically required to state that the response herein is not legal advice and does not create an attorney/ client relationship. Also, there are no recognized legal specialties under Pennsylvania law. Any references to a trust, estate or tax lawyer refer only to the fact that Mr. Fromm limits his practice to these areas of the law. These responses are only in the form of legal education and are intended to only provide general information about the matter within the question. Oftentimes the question does not include significant and important facts and timelines that if known could significantly change the reply or make such reply unsuitable. Mr. Fromm strongly advises the questioner to confer with an attorney in their state in order to ensure proper advice is received. By using this site you understand and agree that there is no attorney client relationship or confidentiality between you and the attorney responding. This site should not be used as a substitute for competent legal advice from a licensed attorney that practices in the subject area in your jurisdiction, who is familiar with your specific facts and all of the circumstances and with whom you have an attorney client relationship. The law changes frequently and varies from jurisdiction to jurisdiction. The information and materials provided are general in nature, and may not apply to a specific factual or legal circumstance described in the question or omitted from the question. Circular 230 Disclaimer - Any information in this comment may not be used to eliminate or reduce penalties by the IRS or any other governmental agency.

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Posted

I agree with the other two answers and would add that you really need to get expert advice on doing a non-taxable like-kind exchange under Internal Revenue Code section 1031, particularly because any equipment or other property that would go with the old farmland may give rise to taxable income even if the exchange of the land itself is non-taxable.

There are also a number of different ways to accomplish a valid 1031 like-kind exchange, including methods for allowing you to have the new farmland acquired for you by a qualified intermediary before you find someone who wants to acquire the old farmland you want to get rid of. There are a number of different rules and requirements for these exchanges that must be very carefully adhered to or the entire exchange becomes taxable. You must absolutely not engage in any of these exchange methods without having competent representation.

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