1031 Exchange - Click here for 1031 Reverse Exchange
A 1031 Exchange refers to section 1031 of the United States IRS code which outlines how like kind properties may be exchanged with no gain or loss recognized. The idea is that since you are simply exchanging one property for another, there is no monies to be recieved that would allow you to pay a tax.
These are specifically structured transactions that join together the sale of an old property and the purchase of a new property for the purpose of deferring taxes.
Exchanges are primarily used for buying and selling investment real estate, but they can also be used for personal property that is used in a business. Examples of qualifying property include bare land, rental property, commercial buildings and homes other than your primary residence.
The purpose of the 1031 exchange is to defer the capital gain taxes that are due when you sell property that has increased in value or been depreciated for tax purposes. These federal and state capital gain taxes can be costly . Internal Revenue Code Section 1031 offers you some relief. It allows you to defer payment of capital gain tax by investing in a new qualified property. By doing so, you are not giving away the principal from your investment.
An exchange can benefit you in several ways. By deferring taxes you have increased flexibility, leverage and buying power. Exchanges also allow you to change, diversify or consolidate your investments.
To reap the benefits of a 1031 exchange, you have two main concerns; primarily meeting IRS requirements and then choosing a Qualified Intermediary. The professional you choose to handle the exchange should be supported by a team of CPA's and Board Certified Real Estate Attorneys with experience in this specialty.
Below are 6 rules that must be followed in order to meet the strict guidelines that the IRS has outlined:
- Both properties (the one you're selling and the one you're purchasing) have to qualify for business or investment use. You can't exchange your primary residence under a 1031 exchange.
- Without exception you have 45 days from the date that you close on the sale of your property to identify other properties you wish to buy.
- From the original closing date of your property, you have a total of 180 days to close on the property you wish to buy.
- You must have a qualified intermediary (QI) to handle the funds and legal documents.
- Title must be taken on the new property exactly as it had been held with the primary property used in the exchange.
- To guarantee complete deferment of the capital gains tax, all or more of the proceeds from the initial sale must be reinvested.
Don't be intimidated by 1031 Exchanges. The Pfeil Partners will give you the ins and outs of how to structure your 1031 Exchange transaction with the help of the other qualified professionals. For more information on 1031 Exchanges, please call or email us today!
1031 Exchange Experts • Internal Revenue Service
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