Use a 1031 Exchange to Defer Taxes on Gains on the Sale of Real Estate.
What is a 1031 Exchange? First, why do we refer to this type of transaction as a 1031? The reason is because its name comes from the U.S. Internal Revenue Service Code Section 1031. It is found at U.S.C Sec. 1031. The 1031 Exchange is a way to sell real estate by taking the money from the sale and putting it toward the purchase of a new real estate property.
How can you get More Information? For the most part, the purpose of the 1031 Exchange has to do with deferring the taxes. So you should work the sale and purchase transaction not only with an attorney but also with your accountant. The I.R.S. has some very helpful information as well. They can be found at Publication 544 issued by the I.R.S. Contact us to discuss more about using a 1031 Exchange.
What are the Time Requirements to do a 1031 Exchange? One important factor of a 1031 Exchange is the time deadlines involved. There are strict 45 to 180 day time periods for an exchange transaction. Once the sale of the old property is accomplished, the seller has 45 days to identify the new property which must be equal to or greater in value than the property sold. Then, the seller has 180 days from the sale in order to purchase the new replacement real estate.
What Does a ‘Like Kind Property’ Mean? The seller must purchase replacement property that is like the property sold. Generally, this is broadly interpreted and can mean that if the property sold is a duplex, the seller can buy an office building as a qualifying ‘like-kind property’.
Must the Properties be Held for Investment Purposes? The real estate properties involved must be investment properties. They can not be used, for example, for a personal residence, the seller lives in.
Does a Qualified Intermediary have to be used? The seller must not have direct access or receipt of the sales proceeds. Therefore generally, a Qualified Intermediary is used to hold the proceeds from the sale until the purchase of the replacement property occurs. The Qualified Intermediary has to be a true third party from the seller, and can not be the seller’s accountant, lawyer or real estate broker. There are reputable companies that specifically exist to serve as a qualified intermediary to the transaction.