The 1031 Exchange Made Simple: It Could Be Right Up Your Alley

Those who aren’t in the real estate business may have never even heard the term “1031 exchange,” but that doesn’t necessarily mean it is of no use to you. In particular, a 1031 Exchange could be particularly useful if you’re planning to sell one investment property and purchase another.

To be clear, the 1031 exchange, or “like-kind exchange,” must follow strict rules set forth by the Internal Revenue Service. (Check with your tax attorney and/or your CPA to determine what these rules are.) While there are exceptions, the guidelines provided below provide a general overview to help determine if a 1031 exchange might be right for you:

1 IRS Section 1031 provides an exception for paying taxes on the gain from the sale of a business or investment property. If you reinvest the proceeds in similar, or “like-kind” property as part of a qualifying 1031 exchange, you may postpone (or defer) paying taxes on the gain. Any taxpaying entity, including individuals, may set up an exchange.

2 The simplest (and rarest) form is a simultaneous swap of one property for another. Deferred exchanges are more common, and they allow you to dispose of property and subsequently acquire one or more other similar replacement properties.

3 Both properties must be used for business or investment purposes. Generally, primary residences or vacation homes don’t qualify.

4 One of the most important guidelines for deferred exchanges relates to time limits. Typically, you have 45 days from the time you sell your property to identify potential replacement properties (and follow guidelines proving you have done so).

5 Also typically, the replacement property must be received and the exchange completed no later than 180 days after the sale of the exchanged property or the due date of the income tax return for the tax year in which your property was sold (whichever comes first).

Please contact your tax attorney and/or your CPA to determine whether your specific transaction would qualify for a 1031 exchange.

If you need assistance with your 1031 (or reverse 1031), call First National Title Company today at one of our offices listed below. Or contact us here for more information about any of our exceptional real estate services.