What Is The 1031 Tax Free Exchange?
Posted: under Real Estate.
Tags: 1031 tax free exchange, Personal Finance, Real Estate, taxes
Many people are unfamiliar with the 1031 tax free exchange of properties. In layman’s terms it is a “like-kind” exchange, wherein a person is actually trading one particular asset (investment property) for another asset (investment property), regardless of whether it is in the industrial, office, residential or retail sector. Many people take advantage of this when real estate markets are in rapid appreciation, as it can result in large capital gains after the sale of a property. The IRS 1031 exchange is basically a tax deferment tool and many of the tax laws have become more simplified. It is not nearly as intimidating as it once was either; however, there are still some complex aspects to the rules.
Every so often there is some misunderstanding concerning the qualifications for property termed as “like kind”. Some examples of eligible properties comprise apartments, duplexes, raw lands, commercial properties and single family rentals. For instance, you can exchange a single family rental for raw land or an apartment building or a commercial building and the transaction can take place anywhere in the United States.
Some property owners are leery of attempting a 1031 tax free exchange as they believe that the sale of the old property and the acquisition of the new property must be completed at the same time. But in reality the 1031 like kind exchange is almost never a two party, or two person trade. Many are delayed exchanges that make use of the 180 days allowed to complete the transaction, from the sale of the one property to acquiring the new property. However, you only have 45 days from the closing of the sold property in which to advise the IRS of the replacement property’s identity.
The rules regarding 1031 exchanges are applicable whenever you intend to sell a property that is not your main residence (and conforms with the like kind guidelines), and you plan to purchase a property inside of 180 days following closing the sale on the property.
In order to keep some flexibility you may want to consider separate exchanges for every property that you are considering relinquishing in a 1031 tax free exchange; however, there is no limit to the number of properties that may be traded during one exchange, which many owners and investors do find useful, especially if they have several properties that they want considered in a short period of time.
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. 1031 exchange properties allow the investor to defer the taxes under certain conditions.
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Feb 02 2010



