This is just a brief overview of what the 1031 Exchange requirements are. If you would like further details on how an exchange works, or on a specific scenario, please contact me at 850.520.2244 or firstname.lastname@example.org and I will be happy to put you in touch with one of the local exchange facilitators (QI) that we use. Please contact your personal tax adviser with any tax related questions.
Increased Income Potential
Defer Taxes ~ Possibly Eliminate Them
You have to “swap” properties.
1031 Exchanges now enable you to sell your property to someone totally unrelated to the person from whom you are purchasing the replacement property from.
I have to purchase something that costs more than what I am selling.
This is only true if you want to defer ALL of the capital gains tax. You can purchase a less valued property, and still retain some tax benefit.
I can only exchange into the same type of property as what I am selling.
All real estate qualifies for a 1031 Exchange. This means that you can sell a vacant lot, and exchange into a residential property, commercial property, etc. and vice versa.
Why bother? I will have to pay the tax sooner or later.
Not necessarily. Through careful planning, you can ensure that you don’t ever have to pay the tax.
The 5 basic rules of exchanging…
Net Selling Price (NSP):
In order to defer all of the tax, the investor must purchase a property that is equal to or greater than the NSP of the relinquished property.
Property Must Be Held For Investment/Business Use:
Investor may not exchange primary or second home, unless the second home is rented a portion of the year (consult QI for details). Aside from that, all real estate qualifies.
Investor has 180 days to complete the exchange. This means that the investor must close on all intended purchases within 180 days of closing on the exchanged sale.
Within the first 45 days of the 180 day period, the investor must identify up to 3 possible replacement properties. Only the properties identified as of day 45 will qualify for the exchange. (Restrictions apply to investors who wish to identify more than 3 properties)
Investor must use a Qualified Intermediary (QI) to facilitate the exchange. The QI may not be any agent or fiduciary of the investor (ie. Attorney, CPA, Real Estate Agent, etc.)