1031 Exchange

Whenever you sell an investment property and you have a gain you have to pay tax at the time of sale.  However, IRC Section allows you to postpone paying tax if you reinvest the proceeds in a like-kind exchange.  The gain is deferred, but not tax free.  There can be some recognized gain in the transaction when a taxpayer exchanges the property for one of lesser value.  Any individual owner of an investment property qualifies.  A deferred exchange when the taxpayer uses the proceeds of one sale to purchase another property.  There is also a reverse exchange.  A property is purchased through an exchange accommodation title holder and within 180 days sells the first property.  The simplest type of exchange is one property for another.

Both properties must be held for investment; no primary residences, second homes, or vacation homes.  Quality or grade of the home does not matter.  Most real estate is considered like-kind.  The taxpayer may use the 1031 exchange between different types of houses; for example, a duplex for a single family home.

There are two time limits to complete a 1031.  From the 45 days from the date of sale you must identify potential replacement properties.  The identification must be in writing, signed, and delivered to the seller of the replacement property.  Follow IRS guidelines for this process.

The second limit is that the replacement property must be received and the exchange completed within 180 days after the sale of the first property or the due date of the income tax return for the tax year the property was sold.  The earlier date is used, but you may use extension for your income tax return.

Beware of schemes. Be aware of homes that qualifying, difference between tax-free and tax-defer, and what cash proceeds are being exchange.  Consult the IRS publications on their website or talk to a tax professional for any questions you may have.