So what is a 1031 exchange and how does it work? A Section 1031 tax-deferred exchange, often called a "like-kind exchange," is a provision in the U.S. Internal Revenue Code that allows taxpayers to defer paying capital gains taxes on the sale of certain types of real property when they reinvest the proceeds into a similar (or "like-kind") property. This deferral can significantly benefit investors, as it allows them to roll over gains from one property into another without an immediate tax hit, thereby potentially increasing their real estate holdings.
Read on to learn more about what a 1031 exchange is and how they work. For more information or to find out if a 1031 exchange is right for you, contact us today.
Key Aspects of a Section 1031 Exchange:
When answering the question “What is a 1031 exchange?” it is important to consider some key aspects and requirements of the process. These include:
- Like-Kind Property: To qualify for a 1031 exchange, both the property being sold (the "relinquished property") and the property being purchased (the "replacement property") must be of "like-kind," meaning both are investment or business properties. Personal property, stocks, and bonds are generally not eligible, and primary residences do not qualify.
- Tax Deferral, Not Elimination: A 1031 exchange does not eliminate capital gains taxes; it merely defers them. When the taxpayer eventually sells the replacement property without a further 1031 exchange, they will owe capital gains taxes on the original property’s gains plus any appreciation on the replacement property.
- Qualified Intermediary Requirement: The IRS requires a "qualified intermediary" (a neutral third party) to handle the exchange. The taxpayer cannot receive the proceeds from the sale directly; instead, the intermediary receives the proceeds and uses them to purchase the replacement property on behalf of the taxpayer.
- Strict Timelines: To complete a 1031 exchange, the taxpayer must:
- Identify the replacement property within 45 days of selling the relinquished property.
- Complete the purchase of the replacement property within 180 days of the sale.
- Types of 1031 Exchanges:
- 1031 Delayed Exchange: The most common type, where the taxpayer sells one property and buys a replacement property later within the required timeframe.
- Reverse 1031 Exchange: The taxpayer purchases the replacement property first, then sells the relinquished property.
- 1031 Improvement Exchange: Allows the taxpayer to make improvements to the replacement property using exchange funds.
Contact Us to Start your 1031 Exchange
Section 1031 exchanges can be a powerful tool for investors aiming to defer taxes and increase their investment portfolios, but they come with strict requirements that must be carefully followed to avoid triggering tax liabilities.
If you want to learn more about what a 1031 exchange is or to explore the benefits of a 1031 tax exchange, contact us today to learn more about how we can serve as your trusted 1031 exchange intermediary.
