The 1031 Exchange allows you to sell one or more appreciated assets such as rental or investment real estate, and defer the payment of your capital gain taxes by acquiring one or more replacement properties.
1031 Tax Deferred Exchanges allow you to keep 100% of your money (equity) working for you.
There are specific requirements to follow so your sale transaction will qualify for 1031 Tax Deferred Exchange treatment under Section 1031 of the IRS tax code.
The sale and the purchase transactions must be structured properly in order to qualify for tax-deferred treatment under a 1031 Exchange.
The Qualified Intermediary, often referred to as the 1031 Exchange Accommodator or the 1031 Exchange Facilitator, must complete the necessary legal documents to ensure that you are in compliance will all laws, regulations and rulings. Contact Us for recommendations for a local lender who can assist.
Reinvesting or Replacing Your Investment Values
You must acquire one or more replacement properties that are equal to or greater in net purchase value than the net sales value of the relinquished property you sold. You must reinvest all of your net cash proceeds from the sale of the relinquished property. And, you must replace the debt that was paid off on the sale of the relinquished property with an equal amount of debt on the like-kind replacement property.
You can always add more cash into your purchase of your like-kind replacement properties, but you can not pull any cash out of the sale of your relinquished property without incurring depreciation recapture and/or capital gain income tax liabilities.
Timelines for a 1031 Exchange
The investor (or exchanger) must follow the strict 45- / 180-day guidelines for an exchange. Once the exchanger sells his/her property (relinquished property) he/she has 45 days to identify property(s) of equal or greater value. Once identified, the exchanger has 180 days from the day he/she sold their property to acquire the property(s) identified (or 135 days from the end of the 45-day period).
Like-Kind Property in a 1031 Exchange
The investor must acquire “like-kind”property. This means that it must be other qualifying forms of real estate. For example, the exchanger could sell a duplex and purchase a commercial property, or he/she could sell a piece of land and buy an apartment building. The property just needs to be “like-kind.” You cannot sell your primary residence and buy an investment property, nor could you sell and investment property and purchase a primary home and still qualify.
You should always consult with your legal, tax and financial advisers to determine which tax deferral or tax exclusion strategy is the most suitable for your specific circumstances.
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