1031 Exchange - So named because it is defined in section 1031 of the IRS Code, 26 U.S.C. § 1031, this refers to a commonly utilized tax break which allows capital gains taxed to be deferred in certain cases in real estate transactions. Considered one of the best ways to preserve wealth, the 1031 exchange, or Like Kind Exchange, generally allows a homeowner or real estate investor to sell one property and defer all capital gains taxes if the proceeds of the sale are reinvested in an asset of like kind, generally in more real estate.
1031 exchanges are specifically structured transactions that join together the sale of an old property and the purchase of a new property for the purpose of deferring taxes.
Exchanges are primarily used for buying and selling investment real estate, but they can also be used for personal property that is used in a business. Examples of qualifying property include bare land, rental property, commercial buildings and homes other than your primary residence.
When doing a 1031 exchange, you will need to make sure the replacement property is equal or greater value to that which you are selling in order to have a completely tax free exchange. Any monies remaining, also called "boot" will be taxed as capital gains.
Prudent use of the 1031 exchange can shield all the capital gains on your properties until you reach retirement. Other tax strategies can preserve the gain thereafter. This makes real estate one of the best investments available, provided you do your homework.
The replacement property must be of the same like and kind. This means that if you are selling an investment property you must replace it with another investment property, and not a purchase a new primary residence. Before selling and purchasing any property, be sure to speak with a CPA or accountant to ensure proper compliance to the 1031 exchange regulation.
1031 exchanges can be done for situations where the next purchase is for an equal or larger amount than the selling price. This doesn't mean that your next purchase has to be one property for a larger amount but could be several properties that are for a larger amount. Your escrow officer is best able to explain all these ins and outs.
1031 Exchange - A 1031 exchange is a vehicle that allows investors to avoid paying capital gains tax on the appreciation of a property when they sell. While you can avoid the taxes, there are certain things that you must do in order to stay within the guidelines of a 1031 exchange.
When contemplating selling any of your properties, before you list for sale or entertain a sales offer, please consult your CPA for advice and counseling on your transaction. The decisions you make regarding the sale of your property could cost you or save you thousands of dollars.
Taxes are not actually avoided completely, but are deferred.
Your adjusted cost basis in one property is transferred to your new acquisition. There are requirements regarding debt and purchase price etc.
Check the IRS guidelines if involving a client in them. You MUST use a 3rd party accommodator, and exchanger cannot have access to the funds.
The amount of time to identify and close the new transaction is very specific. Be careful!
Please remember the all of the profit from the sale must stay in escrow till you re-invest in your new property, if the money is pulled out of escrow for any reason you may lose your 1031 Exchange.
1031 Exchange - A 1031 Tax Free Exchange is a way for a property investor to avoid paying capital gains tax on the sale of a investment when the investor plans to re-invest those gains in the purchase of a replacement property.
There is usually a certain time period in which you have to identify as many properties as you want for the exchange. Once you have identified the properties you then have another time period in which to close on one of those properties. Always seek legal advice if you are considering a 1031 exchange.
The 1031 exchange "like and kind" provision for Real property is quite broad, and includes Land, Rental, and Business property. Any of which, can be exchanged for the other. The like kind provision for Personal property is more restrictive.
If the proceeds for the sale are handled by you, then you are no longer able to do a 1031 exchange.
Using a proper 1031 Exchange company is always important. Contact your local Title Insurance office to see if they have an in house exchange service or can direct you to a trusted company in your area.
It is important to remember the profit from the sale must stay in escrow till you re-invest. If the money touches your hands you risk losing the 1031 Tax Free Exchange.
The replacement property must be "like-kind". This means that if you are selling an investment property you must replace it with another investment property; you can't use it to purchase a primary residence.
An "Equity Trade" is a direct, across-the-table exchange of one property for another. The 1031 (or 1034) exchanges are usually non-owner properties. Section 1031 or 1034 on the IRS codes allow for deference of federal taxes on any gains providing the property is traded for property and not cashed out.
Common Types of 1031 Exchanges - There are 4 basic types of 1031 exchanges; Simultaneous, Delayed, Reverse, and Improvement exchange.
1031 Simultaneous Exchange - This type of exchange is covered under the Safety Harbor Regulations and occurs when the closing of both the relinquished property and replacement property take place on the same day.
1031 Delayed Exchange - Also known as a Forward Like Kind Exchange or Starker Exchange, these exchanges allow the deferral of tax even so long as three conditions are met. First, the Replacement Property must be acquired within 180 calendar days of the disposal of the original, now Relinquished Property. Second, the actual purchase price of the new Replacement Property must be at least equal to or greater than the price at which the Relinquished Property was sold. Finally, 100% of the equity proceeds received or gained due to the sale of the original Relinquished Property must be used in the acquisition of the new Replacement Property.
1031 Reverse Exchange - This is a title holding exchange which the relinquished property is sold after the replacement property has been closed on. This type of exchange is covered under the new safe harbor guidance of reverse exchanges and calls for the intermediary to hold title to the replacement property until the relinquished property is closed on. Once the relinquished property is closed on, the replacement property is conveyed to the taxpayer from the intermediary.