Reasons To Sell Your Honolulu Real Estate-1031 Exchange
April 16th, 2008 categories: 1031 Exchanges, Reasons To Sell
Before you consider an IRC Section 1031 Tax Deferred Exchange you will want to seek counsel from your financial advisor, CPA, accountant, attorney and qualified experts in 1031 Exchanges.
After all of my chatter about the value of owning Honolulu real estate, I’ll bet you’re wondering, “Why should anyone ever sell something they own in Honolulu?” And my answer is, the only reason to sell is if you have something better to do with the money or if you can do something with it that is more meaningful to you. I will spend the next few months writing blogs about “Reasons To Sell Your Honolulu Real Estate”. This blog is the first of what will be many installments in this series.
Let’s assume that you live in the outside Hawaii and have owned a property here for the past 20 to 30 years. You were stationed here with the military, your career brought you or you are someone who grew up here. In any case, you don’t see yourself moving back to Honolulu and you have all of this equity built up in your piece of the rock. Homes in Honolulu can easily be $1,000,000 and condos can cost $500,000. If you sell, you are looking at a combined State of Hawaii and federal capital gains rate as high as 22.25% of you long term gain. Given your length of ownership almost all of a sale will be subject to the capital gains tax. This means that on $1,000,000 sale you are looking at capital gains taxes of approximately $222,000 and half of this on a $500,000 sale. What to do? What to do?
The easiest solution is for you to complete an Internal Revenue Code (IRC) Section 1031 Tax Deferred Exchange. These can be very simple or they can become very complicated. Let’s talk about he basics. First, list your property for sale with someone experienced in 1031 Exchanges (like me). Second, accept an offer for the purchase of your Honolulu property. Third, be sure that the buyer of your Honolulu property has cleared all of the major contingencies in the purchase contract. Fourth, once the contingencies are cleared start looking for a property in your area that meets your rental income goals and needs. Fifth, make an offer to purchase the property in your area and be sure that your purchase is conditioned on the close of your sale here in Hawaii. Sixth, close the sale in Hawaii and be sure that you have enlisted the help of a 1031 accommodator, facilitator or qualified intermediary (they hold the proceeds from the sale, because if you receive them you will be taxed!) Seventh, go through with the purchase process in your area and close the sale on your new replacement property. Remember this is the easy version.
Here are the general rules you must meet to complete your 1031 Exchange (note that this is an overview and not a comprehensive or exact list).
1. Purchase a property of equal or greater value than the one you sold.
2. You have 45 days from the close of your Honolulu escrow to identify your replacement property.
3. You have 180 days from the close of your Honolulu escrow to close the sale on replacement property
4. You will have to have a loan equal to or greater than the loan (s) against your Honolulu.
This blog is an overview of the process and I don’t want you to rely on it to determine whether or not a 1031 Exchange is the right thing for you. Before you consider an IRC Section 1031 Tax Deferred Exchange you will want to seek counsel from your financial advisor, CPA, accountant, attorney and qualified experts in 1031 Exchanges.
