A 1031 exchange is a simple strategy and method for selling one investment property, that’s qualified, and then proceeding with an acquisition of another property (also qualified) within a specific time frame. The logistics and process of selling a property and then buying another property are practically identical to any standardized sale and buying situation, a “1031 exchange” is unique because the entire transaction is treated as an exchange and not just as a simple sale. Thanks to IRC Section 1031, a properly structured 1031 exchange allows a property owner to sell a property, to reinvest the proceeds in a new property and to defer all capital gain taxes, facilitating significant portfolio growth and increased return on investment.
Due to the fact that exchanging, a property, represents an IRS-recognized approach to the deferral of capital gain taxes, it is very important for you to understand the components involved and the actual intent underlying such a tax deferred transaction.
The two major rules to follow are:
- 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 property, must be used to acquire the replacement, “like kind” property.
There are 2 timelines that anybody going for a 1031 property exchange must abide by and know.
The Identification Period: exactly 45 days from the day of selling the relinquished property. This is the crucial period during which the party selling a property must identify other replacement properties that he proposes or wishes to buy.
The Exchange Period: exactly 180 days after the date on which the person transfers the property relinquished or the due date for the person’s tax return for that taxable year in which the transfer of the relinquished property has occurred, whichever situation is earlier. This is the period within which a person who has sold the relinquished property must receive the replacement property.
If you will be performing a 1031 exchange you must contact a qualified intermediary 1031 exchange company immediately!