1031 Exchange, Like-Kind Exchange, and Starker Exchange — these are all terms that are buzzing off investors lips lately, and for good reason. The US Virgin Islands are now eligible to partake in 1031 tax-deferred property exchanges. So what could this mean for you? If you own investment or rental property, a 1031 exchange could enable you to defer tax liability from the property's sale if the funds are used to reinvest in a second property of a "like-kind." That is to say, you could use the 1031 exchange to seize on investment opportunities in the US Virgin Islands.
Benefits of a 1031 ExchangeWhen you sell your Caribbean investment property, you will be required to pay a capital gains tax on your profits at either a short-term or long-term capital gains rate. But, if you instead reinvest profits from the sale in a like-kind property of the same or greater value, Internal Revenue Code Section 1031 provides for you to defer the tax liability. This opens up a world of possibilities for investors looking to diversify or move markets entirely -- including stateside investors seeking opportunities in the the US Virgin Islands. Other advantages to a tax-deferred exchange include:
- The potential to increase investment income by moving to more profitable real estate markets.
- Property consolidation for those seeking to consolidate multiple investment properties into a single property.
- Market diversification for those seeking to convert one investment property into multiple properties across various locations.
- Exchanging one type of investment property for another kind of investment property (i.e. land in exchange for a single-family home)
1031 Basic QualificationsInternal Revenue Code Section 1031(a)(1) states: “No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if the property is exchanged solely for property of a like kind that is to be held either for productive use in a trade or business or for investment.” This indicates any real estate primarily held for investment or held for productive use in a business may be eligible for a 1031 exchange with these basic qualifications:
- The new investment property must be of "like-kind" to the property being sold.
- A personal residence will not qualify for the exchange, but a vacation home used predominantly as a rental property could qualify.
- The like-kind property to be purchased must be identified within 45 days; the purchase must be completed within 180 days after the sale of the original property.
- A Qualified Intermediary must ensure that all eligibility requirements are adhered to. For instance, the investor must not have access to funds from the sale during the period of exchange, so a third-party Qualified Intermediary will hold the funds in an interest bearing account.
- There are limitations on the amount of capital gain that may be tax deferred. Consult an advisor for more information on this and additional stipulations.