1031 Exchange Rules
If a real estate investor wishes to sell one of their properties and does not want to pay taxes on it, then they will need to follow the 1031 exchange. The real estate 1031 exchange allows the investor to defer the taxes if they purchase another property that is as much in price as the one that they are selling. Naturally, there are some very strict rules concerning this; one being that if you happen to write a blog about the rules or the deadline and the information is not exactly correct, then the 1031 will be invalidated.
If you own an investment property or a business, then you may be able to benefit from this trade and possibly save quite a bit of money, simply by exchanging assets rather than selling them. A “like kind” exchange under the IRS 1031 Exchange applies to personal property and real estate and may save you both state and federal taxes, anywhere from approximately 15 to 36% per dollar gained, depending upon your individual state’s tax rate.
In order to take advantage of this you must use a Qualified Intermediary (QI) to facilitate your exchange in order to satisfy the Internal Revenue Service’s requirements of a valid 1031 exchange. This also works to your advantage as using a trained QI will help ensure that the exchange is approved by the IRS. Their involvement includes participating on behalf of the taxpayer by buying and selling the assets and holding the funds for the taxpayer.
Once your property has been sold, you will have 45 days to declare the potential replacement business or property that is the 1031 like kind exchange of the property that has been sold. Fortunately, all real estate is considered “like kind” so you can trade an office building for land, etc. Once approved, you must acquire your like kind property within 180 days from the date you sold your old property. In order to defer 100% of the taxes from the sale you have to meet two requirements with the new property; first you have to buy a property that is of equal or greater value than your old property. Then you must use 100% of the net proceeds from the old property to obtain the new property.
In order to be in compliance with the 1031 rules, the last step is to be sure that the person who sells the property is the same one who buys the property. If the real estate that you sold was titled to you individually, then the new property will have to be titled to you as well. In order to be sure the 1031 exchange is approved the same holds true if the original property was titled to a corporation or partnership; the new property has to be titled to the same corporation or partnership.
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