What is a 1031 Exchange?
A 1031 exchange is often a good option for investors wanting a tax deferment to postpone capital gains taxes. However, not everyone can use a 1031 exchange and of course there are very specific rules to follow.
Only investment properties can qualify for a 1031 exchange or properties owned in a business. This means private residences or second non-rental homes will not qualify. The exchange must be between two like properties. The properties must both be used for investment or business purposes, but they do not have to have the exact same use. For example, an apartment can be exchanged for a strip center.
The IRS has strict guidelines to meet the criteria for an exchange. First and foremost, you must move quickly. You only have 45 days to identify the replacement property following the sale of the initial property. You do not have to close within 45 days, but must have an accepted offer. You can purchase up to three properties of like value or as many properties as necessary to total the sum of the property you are exchanging.
Once you have an accepted offer, you have 180 days from the sale date of your previous property to close on the exchange. Some choose to simultaneously close on both the previous and new properties to make the transaction less complicated. However, if you cannot close on both properties simultaneously, you must use a bank or an attorney qualified to hold the sale money until the exchange is complete.
If you end up with any cash from the exchange to even out the value, that cash will be taxed at current capital-gains rates.
By the way, two important points here: the properties can only be located in the United States and no, you won’t qualify for deferred capital gains if you receive an exchange from a familial relationship and then sell it within two years.
If a 1031 exchange is in your future, start your search as soon as possible for the like property; 45 days comes very quickly, especially when you factor in the negotiation process.
Only investment properties can qualify for a 1031 exchange or properties owned in a business. This means private residences or second non-rental homes will not qualify. The exchange must be between two like properties. The properties must both be used for investment or business purposes, but they do not have to have the exact same use. For example, an apartment can be exchanged for a strip center.
The IRS has strict guidelines to meet the criteria for an exchange. First and foremost, you must move quickly. You only have 45 days to identify the replacement property following the sale of the initial property. You do not have to close within 45 days, but must have an accepted offer. You can purchase up to three properties of like value or as many properties as necessary to total the sum of the property you are exchanging.
Once you have an accepted offer, you have 180 days from the sale date of your previous property to close on the exchange. Some choose to simultaneously close on both the previous and new properties to make the transaction less complicated. However, if you cannot close on both properties simultaneously, you must use a bank or an attorney qualified to hold the sale money until the exchange is complete.
If you end up with any cash from the exchange to even out the value, that cash will be taxed at current capital-gains rates.
By the way, two important points here: the properties can only be located in the United States and no, you won’t qualify for deferred capital gains if you receive an exchange from a familial relationship and then sell it within two years.
If a 1031 exchange is in your future, start your search as soon as possible for the like property; 45 days comes very quickly, especially when you factor in the negotiation process.
posted by Christina at 10:26 PM
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