A 1031 exchange is a tax strategy that allows you to defer paying capital gains taxes when you sell an investment property, as long as you reinvest the proceeds into a new, like-kind property. This means you can sell one property and buy another similar one without immediately paying taxes on any gains from the sale.
These like-kind exchanges are covered under Section 1031 of the Internal Revenue Code (hence the name "1031 Exchanges") and apply to federal capital gains taxes. However, each state has their own tax code, and may have different rules for real estate tax withholdings, the ability to complete a tax-deferred sale, or the rules around like-kind exchanges. Below we'll dive deep into these state-level specifics.
In Maine, the real estate tax withholding rules require that every buyer of real property located in the state must withhold a tax equal to 2.5% of the consideration if the property sold is over $50,000. This withholding must be transmitted to the State Tax Assessor within 30 days of the property transfer unless the State Tax Assessor authorizes the buyer to release the amount withheld, or a portion of it, to the seller.
There are exceptions to this requirement, including:
For 1031 exchanges, an exemption may be available by submitting Form REW-5 ("Request for Exemption or Reduction in Withholding or Maine Income Tax on the Disposition of Maine Real Property") at least two weeks prior to closing.
For more information, you can contact the Maine Revenue Services at 207-626-8473 or visit their website.
The Combined Rate accounts for Federal, State, and Local tax rate on capital gains income, the 3.8 percent Surtax on capital gains and the marginal effect of Pease Limitations (which results in a tax rate increase of 1.18 percent).
Bracket levels adjusted for inflation each year. Release dates for tax bracket inflation adjustments vary by state and may fall after the end of the applicable tax year. Deduction or exemption tied to federal tax system. Federal deductions and exemptions are indexed for inflation. Maine's dependent personal exemption is structured as a tax credit.
Many states recognize and follow the federal rules for a qualifying 1031 exchange. We recommending reviewing these resources for 1031 exchanges at the federal level - learn about the rules for an exchange, the key deadlines you must meet, and why you are required to work with a Qualified Intermediary like Deferred.com.
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