As taxes continue to go up, we are receiving more and more inquires about 1031 Exchanges, and the pros and cons of doing an exchange versus a traditional sale. Although every situation is unique, a 1031 Exchange can be very beneficial when completed correctly. Below we have some very important information pertaining to the eligibility for a 1031 Exchange and what the
standard process and rules are:
1031 Exchanges are a method of selling a qualified property within a specified timeframe, while proceeding with an acquisition of another qualified property. This process is very similar to the traditional sale and purchase of a property, but the difference is:
- This is an “exchange” and not a “sale” so there is benefits: because “sales” are taxable while “exchanges” are not. In an exchange, all transactions capital gains taxes are deferred.
- There are time restrictions.
1. The total purchase price of the replacement “like kind” property must be equal to, or greater than the total net sales price of the relinquished, real estate, property.
2. All the equity received from the sale, of the relinquished, real estate or property, must be used to acquire the replacement, “like kind” property.
3. The property transactions must be considered “like kind” which is defined as: any asset that you are identifying as a replacement to your current asset has to be similar in value and demeanor and cannot be current residential living quarter.
4. Both properties must be held for a productive purpose in business or trade, as an investment.
5. You must identify the “like kind” asset no more than 45 days after the beginning of the exchange. This deadline is not extendable even if the 45th day falls on a weekend or holiday.
6. The process has to be closed in full after 180 days of the start of the said exchange. This deadline is not extendable even if the 180th day falls on a weekend or holiday.
Example: House for a house, land for land, NO land for a car or collectibles.
7. The entire cash or monetary proceeds from the original sale have to be reinvested towards acquiring the new real estate property.
8. Any leftover cash proceeds retained from the exchange are taxable.
9. The proceeds from the exchange must go through a QI, (qualified intermediary), not through your hands, your agents’, or else the proceeds will become taxable.
10. The replacement property must be subject to an equal or greater level of debt than the property sold or as a result, the buyer will be forced to pay the tax on the amount of decrease.