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A 1031 Exchange - A Definition
A 1031 tax deferred property exchange is an exchange of like kind property in which capital gains tax deferral is available to real estate owners who sell their investment, rental, business or vacation real estate, and reinvest the net proceeds in other real estate. Real Estate held for these purposes are called like-kind/1031 properties.
Property owners may sell like-kind properties and defer taxes on the profits by meeting the requirements of Internal Revenue Code (IRC) 1031 exchange. The purpose of the 1031 Exchange is to allow sellers of like-kind property to buy replacement property of like-kind within a specific time period and defer taxes. This allows property owners to invest in properties with a better risk reward ratio, no management responsibility, increase tax write offs and often, significantly increase their cash flow.
Sellers have a maximum of 180 calendar days from the closing of the initial sale of the relinquished property to complete the exchange into the replacement property. Within the first 45 days of this period a seller must designate candidate properties and properly identify them to the IRS usually through a Qualified Intermediary, also known as an Exchange Accommodator. A seller may identify up to three properties regardless of value, a group of properties with a combined value that does not exceed 200 percent of the value of the initial property sale or any number of properties of any value as long as the final value of the properties exchanged into is equal to 95% of all of the properties identified. The funds in a trust account with the Qualified Intermediary can be used as earnest money in the purchase of designated property once all IRS requirements for a 1031 transaction are met.
If no new properties are identified in the first 45 days and no designated transaction is completed during the full 180 day period, the funds in the trust account will be liquidated and the sale proceeds taxed at the prevailing state and federal capital gains and depreciation recapture taxes.
Many investors don't take advantage of 1031 exchanges because of the fear of the 45 day identification period. This fear is supported by numerous horror stories of failed exchanges and the resulting devastating taxes that can result from such failures.
With proper planning and the right resources investors can navigate the waters of a 1031 exchange unscathed and frequently double or triple their spend able income and diversify their portfolio thus reducing risk.
What is requires to do this is a good grasp of the exchange process, a clear set of investment objectives and a plentiful and consistent source of quality replacement properties. Working with a company like TM 1031 Exchange whose professional staff has on average over 20 years of real estate experience and hundreds of replacement properties is the best way to assure success when doing a 1031 exchange. Top of Page