WHAT IS A 1031 EXCHANGE?
Named after Section 1031 of the IRS Code, it allows an investor to "roll proceeds" from one qualifying property into the investment of another property instead of paying capital gain taxes. This is commonly used by real estate investors to grow their portfolios without incurring immediate tax liabilities.
HERE'S A QUICK BREAKDOWN OF HOW A 1031 EXCHANGE WORKS -
1) Like-Kind Property - The new property must be of "like-kind" to the original sold property. This just means it has to be similar in nature, meaning both properties must be used for investment and/or business purposes.
2) Timeline - A 1031 Exchange must adhere to strict timelines.
Identification Period - 45 days from the sale of the property to identify replacement property
Exchange Period - 180 days from the sale of the original property to complete the purchase of the new property
3) Qualified Intermediary - A QI is required and holds the proceeds from the sale, using them to purchase the replacement property.
4) Deferral of Taxes - By reinvesting the proceeds into the new property, the investor defers capital gains taxes that would otherwise be due on the sale of the original property. Those taxes are not eliminated but deferred until the sale of the new property unless another 1031 exchange is completed.
5) Investment Properties Only - Personal residences do not qualify for 1031 Exchange.
6) Same Taxpayer - The same taxpayer selling the original property must be the same one acquiring the replacement property.
