1031 Real Estate Exchange Tax Deferred Real Estate Exchange This page is intended to provide useful information about tax deferred exchanges of real estate held for investment. There are considerations of time and property value, so check with your tax advisor. What is a 1031 Exchange? A 1031 Exchange is tax deferred exchange of investment property. The sale of some currently owned business property is matched, or exceeded, in value by the purchase of similar business property within IRS time and value guidelines. In the realm of real estate, the "exchange" means that the sale of one piece of investment property will be matched with the purchase of another "like" piece of investment property within the prescribed time period without any capital gains and therefore the individual will "defer" taxes. Is This A Good Idea? In most cases it is a great idea because if offers real estate investors one of the last great investment opportunities to build wealth and defer taxes. By using the 1031 Exchange, the investor can sell their current investment property and use all the proceeds to purchase the replacement investment property. Capital gains taxes are deferred and the investor leverages ALL of their equity into the replacement property. Whether it is a good idea for you should be determined only after a review with your tax advisor. Example: With Traditional Tax Handling
1031 Exchange Provides
What is required? There are two basic requirements that must be met to defer the capital gains tax: (1) you must acquire like-kind replacement property (the new purchase must be of equal or greater value) and (2) you must reinvest all net equity (you cannot receive cash or other benefits from the sale of the original property, all proceeds must go towards the new investment). To quote the tax code: "No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment purposes if such property is exchanged solely for property of a like-kind which is to be held for either productive use in trade or business or for investment purposes". Who Should Use This Tax Deferring Vehicle? Anyone who is considering the sale of one piece of investment property and the purchase of another. What Are The Identification Requirements? You must identify the property to be received within 45 days after the date you transfer the property given up in the exchange. Any property received during that time is considered to have been identified. You must identify the replacement property in a signed written document and deliver it to the other person involved in the exchange. You must clearly describe the replacement property in the written document. You can identify the larger of (1) three properties or (2) any number of properties whose fair market value at the end of the identification period is not more than double the total fair market value, on the date of transfer. What Are The Receipt Requirements? The property must be received by the earlier of
What Are Examples of Qualifying Property? In a like-kind exchange, both the property you give up and the property you receive must be held by you for investment or for productive use in your trade or business. Machinery, buildings, land, trucks and rental houses are examples of property that may qualify. What Are Examples of Non-Qualifying Property?
If you are selling rental property somewhere and want to purchase property in a resort community and use it as rental property, this is considered a like-kind exchange. References and Resources
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