About 1031 Exchanges
As taxes continue to go up, we are receiving more and more inquires about 1031 Exchanges, and the pros and cons of doing an exchange versus a traditional sale. Although every situation is unique, a 1031 Exchange can be very beneficial when completed correctly. Below we have some very important information pertaining to the eligibility for a 1031 Exchange and what the
standard process and rules are:
1031 Exchanges are a method of selling a qualified property within a specified timeframe, while proceeding with an acquisition of another qualified property. This process is very similar to the traditional sale and purchase of a property, but the difference is:
- This is an “exchange” and not a “sale” so there is benefits: because “sales” are taxable while “exchanges” are not. In an exchange, all transactions capital gains taxes are deferred.
- There are time restrictions.
There are a few rules that need to be in place to be able to get a 1031 Exchange started
- The total purchase price of the replacement “like kind” property must be equal to, or greater than the total net sales price of the relinquished, real estate, property.
- All the equity received from the sale, of the relinquished, real estate or property, must be used to acquire the replacement, “like kind” property.
- The property transactions must be considered “like kind” which is defined as: any asset that you are identifying as a replacement to your current asset has to be similar in value and demeanor and cannot be current residential living quarter.
- Both properties must be held for a productive purpose in business or trade, as an investment.
- You must identify the “like kind” asset no more than 45 days after the beginning of the exchange. This deadline is not extendable even if the 45th day falls on a weekend or holiday.
- The process has to be closed in full after 180 days of the start of the said exchange. This deadline is not extendable even if the 180th day falls on a weekend or holiday.
- Example: House for a house, land for land, NO land for a car or collectibles.
- The entire cash or monetary proceeds from the original sale have to be reinvested towards acquiring the new real estate property.
- Any leftover cash proceeds retained from the exchange are taxable.
- The proceeds from the exchange must go through a QI, (qualified intermediary), not through your hands, your agents’, or else the proceeds will become taxable.
- The replacement property must be subject to an equal or greater level of debt than the property sold or as a result, the buyer will be forced to pay the tax on the amount of decrease.