How To Use a 1031 Exchange to Defer Taxes by Sandra Manley

A tax deferred 1031 exchange is basically an exchange of one investment property for a “like kind” asset in order to defer capital gains taxes from the sale of the first property. The advantage for an investor is that it allows them to use profits from one property to reinvest in a new property and to rollover the gains with each successive sale/reinvestment.

There are many rules and professional help is advisable; however, here are a few basics for an investor.

  1. A 1031 exchange is for investment and business use only; it cannot be used for your primary residence. It can be used for vacation homes, although the rules are much stricter than for other investment properties.
  2. Under new tax laws passed in December 2017, a 1031 exchange is for real estate. Prior to December 31, 2017, some types of personal property were allowed.
  3. Properties must be considered “like kind” — although the rules are broad in terms of what types of buildings qualify for an exchange. For example, an apartment building can be exchanged for a shopping center, an office building, or vacant land.
  4. There are time periods in which to both identify and close on the “relinquished” and “replacement” properties.
  5. The replacement property must have a purchase price that is equal or greater than the net sale price of the relinquished property.
  6. An exchange trustee or intermediary must hold all money in between closings. If you personally receive the proceeds, the 1031 is invalidated and the money is taxed.

To learn more, take a workshop (Realty Collective is planning one for June so stay tuned), or consult a real estate attorney or exchange facilitator.

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