What is a 1031 Exchange?
1031 exchanges are specifically structured transactions that join together the sale of an old property and the purchase of a new property for the purpose of deferring taxes. 1031 Exchanges are primarily used for buying and selling investment real estate, but they can also be used for personal property that is used in a business. Examples of qualifying property include: bare land, rental property, commercial buildings and homes other than your primary residence.
How can a 1031 Exchange work for me?
A 1031 exchange can defer the capital gain taxes that are due when you sell property that has increased in value or been depreciated for tax purposes. These federal and state capital gain taxes can be costly. Internal Revenue Code Section 1031 can benefit you in other ways. By deferring taxes, you can enjoy increased flexibility and leverage and buying power. Exchanges also allow you to change, diversify or consolidate your investments.
WHAT YOU MUST KNOW ABOUT 1031 TAX EXCHANGES
REAL PROPERTY USE: Both your old and new properties must qualify as investment or business use. If both properties pass this test, you can exchange nearly any type of real estate.
45 DAY IDENTIFICATION PERIOD: You have 45 days from the closing of your sale to list the properties you may want to buy. There are no exceptions to the deadline.
180 DAY EXCHANGE PERIOD: From the sale closing date, you have 180 days to close on the purchase of one or more properties from the 45-day list. Again, there are no exceptions to this deadline.
QUALIFIED INTERMEDIARY (QI): The IRS mandates that you use a QI to prepare the legal documents for your exchange. Because the QI must be independent, it cannot be your friend, employee, broker, or even your accountant or attorney. The QI also holds your money, so you don't have access to it.
PROPER TITLE HOLDING: You must purchase and take title to your new property exactly as you held title to your old property.
REINVESTMENT REQUIREMENT: To defer all of your capital gain tax, you must buy a property equal or higher in value than the one you sold. Also, you must reinvest all cash proceeds from your sale.