A 1031 Exchange is a transaction where a seller sells one investment property and uses the net sales proceeds to buy a new investment property. This process can allow the seller to defer paying any capital gains taxes that otherwise could be due on the original sale. The basis for a 1031 transaction stems from the Internal Revenue Code Section 1031, from whence it got its name.
NOTE: THERE ARE A MANY RULES, SOME OF THEM CAN BE COMPLEX, GOVERNING A 1031 EXCHANGE TRANSACTION. YOUR ATTORNEY AND ACCOUNTANT SHOULD BE CONSULTED TO MAKE SURE YOU ARE IN COMPLIANCE, AND THE INFORMATION IN THIS ARTICLE SHOULD NOT BE RELIED UPON AS LEGAL OR ACCOUNTING ADVISE.
Not for Homestead Property – a 1031 Exchange is for investment property. A person’s homestead will not qualify for a 1031 Exchange. Investment properties such as vacant land, commercial or residential rental properties van qualify.
Replacement Property Must be Like-Kind from to the Selling Property – there are certain criteria the selling and the buying property must share. The replacement property must be of the same nature, character or class as the property sold.
Time Periods Must be Followed – within 45 days of the sale of the selling property, a qualifying replacement property must be identified. The closing on the purchase of the replacement property must occur with 180 days from the closing on the selling property.
A Qualified Intermediary is Used – a Qualified Intermediary is used to hold the sales proceeds from the sale of the selling property until the money is used at the Closing on the purchase of the replacement property. This ensures that the seller does not have direct access or contact to the sales proceeds, which could defeat an otherwise proper 1031 Exchange transaction. The Qualified Intermediary cannot be the seller’s agent, such as the lawyer, accountant or real estate agent. There are companies and banks that can be hired to serve as the Qualified Intermediary.