A 1031 Exchange, when structured correctly, can defer any capital gains taxes otherwise due on a transaction involving the sale of real estate. There are some requirements for a transaction to meet the legal standards to obtain the defer rights. One such requirement is that the seller acquires a like-kind new property.
Using a 1031 like kind exchange offers those entitled to take advantage of this type of transaction a great opportunity to sell income or investment property and replace it with a like-kind property and not have to pay the gains on the sale. The name 1031 exchange comes from the code section of the Internal Revenue Code Section 1031 that addresses these types of transactions.
The essential rules to a 1031 Exchange include that the property being sold, the relinquished property, must qualify as a property held for investment or used in a trade or business. The newly acquired property, the replacement property, has to be purchased by the same person or entity that sold the relinquished property. The replacement property must be of like-kind to the relinquished property. That means they need to be similar types of properties. They need not be identical though – meaning a 5 story commercial building need not be replaced with only a 5 story office building. The replacement property needs to be identified within 45 days and within 180 days the purchase of the replacement property must be closed.
Our law firm has represented clients in their 1031 Exchange transactions, working closely with accountants and qualified intermediaries to make sure the 1031 Exchange rules are satisfied and maximum benefits received by our clients.