Long used by savvy real estate investors, 1031 exchanges are evolving as an important tool for mainstream real estate consumers. 1031 exchanges are permitted under Section 1031 of the United States Internal Revenue Code. The code allows investors to defer capital gains taxes on the exchange of like-type properties. You should always consult a qualified attorney or tax advisor to determine if or how to use a 1031 exchange.
-A like-kind exchange is a tax-deferred investment, not a tax-free one.
-Like-kind is defined as immovable property also known as immovable property. Qualifying property is described in code 1031. property held primarily for sale, inventories, stocks, bonds or notes, securities, interests in a partnership, and certificates of trust. Personal residences do not qualify.
-The properties must be used for a proper purpose. Both the relinquished property and the replacement property must be held for use in a trade, business, or as an investment.
-The transferred property must be exchanged and not sold for cash.
-Most 1031 exchanges are facilitated by qualified intermediaries who help the taxpayer comply with the IRS Section 1031 requirements.
-The value of the replacement property must be equal to or greater than the value of the transferred property.
– The equity in the replacement property must be equal to or greater than the equity in the relinquished property.
-The debt of the replacement property must be equal to or greater than the debt of the transferred property.
-All net proceeds from the sale of the relinquished property must be used to purchase the replacement property.
-A 1031 exchange ends the moment the taxpayer has control of the income from a relinquished property.
-A qualified intermediary is considered a safe harbor by the IRS. Safe Harbor holds all proceeds from relinquished properties until they are needed for the replacement property. The safe harbor or QI guarantees that the funds will not go to the hands of the taxpayer.
-The title is held in the exchanges 1031 by the taxpayers and not by the Authorized Intermediary. However, the taxpayer assigns his interest in the property purchase and sale contracts to the QI.
-There are strict deadlines for the replacement of a relinquished property. A taxpayer must identify within 45 days from the date a property was delivered as potential replacement properties. Exchanges must be completed within 180 days after the transfer of the relinquished property or the due date of the taxpayer’s federal tax return for the year in which the relinquished property was transferred, whichever occurs first. Extensions are granted in some cases, please consult a QI for details.
This is an overview of the 1031 exchange. There are many additional definitions and sections in the code. You are urged to consult with a qualified intermediary and attorney to obtain the information necessary to determine if a 1031 Exchange is right for you.
