Internal Revenue Code Section 1031 states:
"No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like-kind which is to be held either for productive use in a trade or business or for investment."
"Like-kind" merely means that real property can be exchanged for any other real property. For example, you can exchange raw land for an office building. A single family residence can be exchanged for a triplex. A whole interest may be exchanged for a properly structured tenancy in common interest. One property may be exchanged for more than one property.
A vacation property or a primary residence may qualify as “like-kind” property, and qualify for tax free exchange treatment, provided certain guidelines are followed.
A 1031 exchange is not an exchange in the barter sense. It involves simply the sale of a property and the purchase of another property under certain guidelines. The result is the indefinite deferral of capital gains taxes on the sale.
EXCHANGE TYPES:
- DELAYED EXCHANGE (often referred to as “Starker Exchange”) was codified in the 1984 Tax Reform Act; and it is by far the most common type of exchange. After the closing on the sale of your property you have 45 days in which to identify replacement property (or properties), and 180 days in which to close on the purchase of the replacement property.
- REVERSE EXCHANGE is simply the reverse of a delayed exchange. This occurs when an investor identifies and purchases replacement property prior to the sale of property he relinquishes. Federal guidelines for a reverse exchange were issued September 15, 2000 so we have safe harbor rules to follow.
- AN IMPROVEMENT EXCHANGE allows the investor to construct a new replacement property within certain guidelines including time constraints.
Qualified Intermediary (Facilitator)
In order to properly complete a 1031 exchange and defer capital gains tax, the proceeds from the sale of your property must be kept by a “Qualified Intermediary” until it is used for the purchase of a replacement property. We can assist you in finding a Qualified Intermediary to help facilitate the exchange.
REPLACEMENT PROPERTY CRITERIA
THE 45 DAY RULE requires the Exchanger to identify a potential replacement property or properties within 45 days after the closing of the sale of the relinquished properties.
You may identify properties under the a) 3 Property Rule (most common method) where you identify up to three properties regardless of fair market value, or b) the 200% Rule where you may identify more than three properties provided the fair market value of the identified properties does not exceed 200% of the fair market value of the property relinquished.
THE 180 DAY RULE requires the Exchanger to purchase the replacement property or properties within the earlier of a) 180 days after the transfer of the relinquished property or b) the due date of the Exchanger’s tax return (including extensions) for the year in which the relinquished property is transferred.
The 45 and 180 Day Rules can sometimes be difficult to satisfy because of the time required to locate replacement property, negotiate a purchase, perform due diligence, arrange for financing, etc. Moreover, it is not easy to find replacement properties with the right cost or ratio of equity and debt requirements which you desire. At 1031TaxSavings.com we can help you overcome these potential impediments to a successful tax free exchange because we provide the following VALUABLE SERVICES:
- Consult with you regarding your investment preferences including property type, property location, holding period, amount of debt vs. equity, etc.
- Consult with your advisors and your Qualified Intermediary regarding compliance with Section 1031 together with pertinent rules and regulations, time constraints, etc.
- In light of your investment objectives and specific exchange needs, we provide you with access to a very select group of Tenant In Common properties from which to choose (see TIC Investments and Properties pages). Such properties are offered to you only after we’ve cleared them through our own due diligence process which includes evaluation of the economic merits of the property, the track record of the sponsor and management company, and other pertinent information.
- As a licensed securities representative, we work on your behalf; but any fees are paid to us by the property sponsor. 5. We can assist you with the acquisition of property you wish to hold as a sole owner. Typically such property is leased to a major credit tenant on a triple net lease basis.
Translate this page into a language of your choice!
Local Weather Conditions: 90°F