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What is a 1031 Exchange?
1031 Exchange
A 1031 Exchange is a mechanism that allows one to defer capital gains taxes otherwise incurred at the sale of real estate.
Basic Criteria:1. Properties: Simplified, both the old property and the new property must be either land, commercial or rental property (in certain cases, vacation and even personal residential property can also qualify). You can exchange property for other IRS recognized like-kind property. For example, office buildings could be sold and apartments purchased or an industrial complex sold and raw land purchased. The buying and selling transactions can be separate events involving different parties, just as they would in any arms-length sale and repurchase of property.
2. Money: You cannot touch the proceeds (money). By law, the proceeds from the sale of your current property must be held with a Safe Harbor "Qualified Intermediary or Qualified Escrow Holder" (sometimes also called an "Accommodator" or a "Facilitator"). You cannot place the proceeds in escrow until the second property is acquired, nor can you have a friend, employee, broker, your CPA or attorney hold the money for you.
3. Timing: From the date you close on the sale of your current property, you have 45 days to determine a list of up to three properties you want to own. Also, from the date of closing of the sale of your current property, you have 180 days to close on the purchase of one or all of the properties listed on your 45-day list.
4. Reinvestment: To avoid taxable gain, you must reinvest in a property of equal or greater value. To exchange for property of less value may cause prorated tax liability.
5. Title: The title-holder of the old, sold property must remain the title holder of the new property until after the exchange is completed.
Source: 1031 Financial Exchange Corp.
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