Understanding the 1031 Exchange

Internal Revenue Code 1031 (aka “1031 Exchange) is the tax statute that specifies how tax gains can be deferred when selling your investment property….

Internal Revenue Code 1031 (aka “1031 Exchange) is the tax statute that specifies how tax gains can be deferred when selling your investment property.

Often, the 1031 exchange is referred to as a “like kind” exchange, which can cause confusion.  In real estate investments, “like kind” means “investment real estate”.   IRC 1031 alloes you to transfer the proceeds from the sale of an investment real estate property  directly into another real estate investment and defer your capital gains.  Even though your family home is an “investment”  it is not included in IRC 1031.  “Investment property” would cover rental property, commercial buildings, etc.

Let’s say you do want to sell your office building,  what do you buy?  You can buy a fabulous ocean front house in Hawaii.   Let’s say a family has 3 children who do not want to share one house.   The proceeds from the sale of your commercial building can be used to buy three condos in Hawaii, as long as they are “investment properties”.  Call me and I’ll hook you up!

Now, there are rules you must abide by and I am not qualified to give you financial advice.  I can point you toward the IRS tax code, and HIGHLY suggest that you consult your tax accountant, or better yet, a Qualified Intermediary (or QI).  Every title company has a QI on staff to make sure that your exchange complies with the IRS code and goes smoothly.

It is important to note: IRC 1031 specifies that a replacement property must NOT close “more than180 days” from transfer of exchanged property OR “the due date (determined with regard to extension) for the transferor’s return of the tax imposed by this chapter for the taxable year in which the transfer of the relinquished property occurs”. Make sure to consult your tax professional to make sure you file an extension if needed.

To see the full text on IRC 1031, click here

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