• Help Me Find a Home
• Escrow Process
• Tips and Insight for Buyers
• Market Update
• 1031 Exchange

The Tax Deferred Exchange

(Section 1031 of the Internal Revenue Code)

Why should you consider using a 1031 tax exchange when buying a replacement “like kind” property? Simply put, real estate sales are taxable with the IRS and 1031 exchanges are not. It’s a way to defer capital gain taxes. To determine whether you qualify to use a 1031 exchange, there are two major rules to follow:

1. 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.
2. All the equity received from the sale of the relinquished real estate property must be used to acquire the replacement “like kind” property.

Once you’ve met the above guidelines, the proceeds from the sale must go through a “qualified intermediary” and not through the usual real estate transaction channels or all proceeds become taxable.

Another fundamental rule is that the 1031 exchange process requires that the replacement property must be subject to an equal or greater level of debt than the property sold. If it is not, the buyer will have to pay the tax on the amount of the difference.

During a 1031 exchange process there are two important timelines to meet:

1. The Identification Period: The party selling a property must identify other replacement properties that he proposes to buy. This period is crucial and extends 45 days from the day of selling the relinquished property.  It is not uncommon to select more than one property. This 45-day timeline must be adhered to in all circumstances and is not extendable in any way even if the 45th day falls on a weekend or holiday.
2. The Exchange Period: This is the 180-day timeframe within which a person who has sold the relinquished property must receive the replacement property. This period ends exactly 180 days after the date 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 occurs earlier.

As with any IRS rules, financial issues can be complicated and, therefore, can be misinterpreted. Before you pursue using a 1031 tax exchange, consult with your lender or tax attorney to help you determine if this is the best tax-saving approach for your situation.