A 1031 Exchange defers recognition of the Capital Gains Tax in order to reinvest, as long as new assets are purchased to replace the existing assets.
General Rule: All real estate in the United States is like-kind property
ADVANTAGES OF 1031 EXCHANGE
Easy to do
Capital Gains Tax liability is deferred
Increase cash flow
Consolidate various properties
Forgiven tax benefit for investors heirs
REAL PROPERTY USE
Property that is the subject of an exchange must be held for a proper purpose. Both your old and new properties must qualify as investment or business property use. Property held for personal use (Personal Property) or held primarily for sale (Dealer Property) does not qualify. It is your use of the property that determines its classification. Property must not be used for personal use more than 14 days per year or 10% of the actual number of days the property has been rented in a given year.
45-DAY IDENTIFICATION PERIOD
You have 45 days from the closing of your sale to list the properties you may want to buy. There are no exceptions to the deadline. The Exchanger may identify up to three properties regardless of their fair market value, you may repeatedly revoke identification and make a new ones. If more than three properties are identified their combined or fair market value cannot exceed double (200%) of the fair market value of the relinquished property. Certain exceptions may apply; seek the advice of a Qualified Intermediary.
180 DAY EXCHANGE PERIOD
From the sale closing date, you have 180 days to close on the purchase of one or more properties identified from the 45-day list, this period runs concurrently with the 45-day identification period. There are no exceptions to this deadline. *Note: if the settlement of the relinquished property occurs between October 16 and December 31 of the current year, the 180-day Exchange Period will be shortened to the income tax deadline of April 15 of the next calendar year unless a timely and proper IRS extension is filed for their return. For a corporation, this filing date is March 15 of the next calendar year unless an IRS extension is filed.
The IRS mandates that you use a qualified intermediary (“QI”) to prepare the legal documents for your exchange. Because the QI must be independent, it cannot be your friend, employee, broker, or even your accountant or attorney. The QI also holds your money, so that you do not have access to it.
PROPER TITLE HOLDING
You must purchase and take title to your new property exactly as you held title to your old property.
To defer all your capital gain tax, you must buy a property equal or higher in value then the one you sold. If not you will be subject to Capital Gains Tax on the difference. Replacement property cannot be purchased with the intent to sell immediately. The Exchanger does not have to purchase the same type of property. For example, he can sell a storage facility and acquire an apartment building or sell a raw piece of land and acquire a shopping center.
For a more detailed explanation of the various elements and regulatory requirements of tax deferred exchanges, please contact me and I will put you in touch with a Qualified Intermediary.