1031 Exchanges: What are they used for?
In a regular real estate transaction, the owner of the property is taxed on the gain from the sale unless it is excluded by the Internal Revenue Code Section 1031. But, if an exchange is set up prior to the sale, the taxpayer will receive a safe harbor tax-deferred exchange. This is a way that the property owner exchanges one or more properties for another of like kind which defers the federal and state capital gains taxes due. Simply put it is selling one property and using the proceeds to purchase another property of like-kind.
Whenever you sell business or investment property and you have a gain, you
generally have to pay tax on the gain at the time of sale. IRC Section 1031
provides an exception and allows you to postpone paying tax on the gain if you
reinvest the proceeds in similar property as part of a qualifying like-kind
What is Like-Kind?
Like-kind property is property of the same nature, character or class. Quality or grade does not matter. Most real estate will be like-kind to other real estate.
1031 Exchanges are Tax-Deferred, not Tax Free, like-kind exchanges and are conducted by Qualified Intermediaries.
Reasons Exchanges are Done
- To Defer Taxes
- For Cash Flow (For other investments)
- For Estate Planning
- For Depreciation Deduction (When exchanging to a better property)
Properties That Qualify for a 1031 Exchange
- Property held for the productive use in trade or business (The old and new property)
- Investment property including land
Properties Excluded from 1031 Exchange treatment
Inventory or stock in trade
Stocks, bonds, or notes
Other securities or debt
Certificates of trust
Property used primarily for personal use, like a primary residence or a second home or vacation home, does not qualify
Timeline to Complete a Defered Like-Kind Exchange
There are time limits set to complete a deferred exchange. The first is the 45-day rule: The taxpayer (seller) has 45 days from (and including) the day of the closing to identify a replacement property. The second rule is the 180-day rule: The taxpayer has 180 days to acquire a replacement property. Proper written notice must be given to the Qualified Intermediary within the time constraints.
For a clearer understanding of Exchanges view the IRS Code Section 1031.
*Consult with your Real Estate Attorney and tax professional prior to engaging in any real estate transaction including 1031 exchanges.
Contact Tiffany today at 954-257-5030 to speak with a Real Estate Professional that will help you with these types of transactions and get your property sold.