1031 Exchange

What is a 1031 Exchange?

A Tax-Deferred Exchange represents a simple, strategic method for selling one qualifying property and the subsequent acquisition of another qualifying property within a specific time frame. Essentially, if you sell an investment property and use the proceeds to purchase a Like-Kind investment property, you can avoid paying State and Federal income taxes.

What are the requirements?

For a transaction to qualify for tax-deferred treatment under Section §1031, certain requirements must be met:

1. The property must be “Like-Kind” - Replacement property acquired in an exchange must be like-kind to the property being relinquished. The words “like-kind” refer to the nature or character of the property and not to its grade or quality. In an exchange “like-kind” only applies to real property that has been used for business, trade, or investment purposes. Almost all real estate qualifies for an exchange.  Some properties that can all be exchanged with one and other: Single-Family Rentals, Industrial Buildings, Golf Courses, Retail Space, Farms and Ranches, Hotels and Motels, Leases with 30 years +, Multi-Family Rentals, Offices, Land and others.
2. Minimum reinvestment requirements – Real property that is sold must be replaced with real property. Also, as a rule of thumb the value of what is bought must be equal to or greater than the value of what is sold, less closing costs. Basically all proceeds from the sale of the relinquished property must be re-invested into the new property rather than sold for cash. If any proceeds are left over or used for other purposes they are considered a gain and are subject to taxation. If this is the case, the transaction is a partial tax-deferred exchange.
3. Specific time frame must be followed – Beginning with the close of the relinquished property, you have 45 days to identify in writing the properties you intend to purchase and 180 days (or the due date for your tax return – whichever is earlier) to complete the acquisition of one or more of those properties. In addition, the 45 day identification period and the 180 day exchange period are calendar days. If the 45th day or 180th day falls on a weekend or holiday, the deadlines still apply. There are no extensions for Saturdays, Sundays, or legal holidays.
4. A specific holding period must be met – The general rule is that a taxpayer must hold the property for at least two years before it can be considered for tax-deferred treatment. This rule applies both to the relinquished and replacement properties.
5. You must use a Qualified Intermediary – As stated by the IRS, a Qualified Intermediary must be used in every exchange, even if the Taxpayer has identified a replacement property prior to selling the old property.

If you think that your property qualifies for an exchange, or you simply would like to learn more, please contact me by filling out the form on the right.