1031 Exchanges: The Basics
September 21, 2016 | By Roy Farrens
Are capital gains taxes keeping you from downsizing? A 1031 Exchange might be the solution you are looking for.
What Is A 1031 Exchange?
The 1031 Exchange is a legal way to avoid paying taxes. This tax strategy gets its name from Section 1031 of the Internal Revenue Code, which allows you to postpone paying taxes on gains from the sale of a property if you reinvest the proceeds in a qualified similar property. The 1031 Exchange offers investors an opportunity to build wealth by saving on taxes. By completing a 1031 Exchange, an investor can dispose of their investment property, defer the capital gains tax that would ordinarily be paid, and leverage all of their equity into the replacement property. This type of exchange is also known as a “Like Kind Exchange,” “Delayed Exchange,” “Deferred Exchange,” or “Starker Exchange.”
Who Qualifies for a 1031 Exchange?
Any individual or other taxpaying entity that owns investment or business property may qualify for a 1031 Exchange.
What Type of Property Qualifies for a 1031 Exchange?
Both personal property and real property can qualify as exchange properties. The relinquished property and replacement property must both be held for use in a business or as an investment. Property held for personal use, such as a primary residence or second home, does not qualify for a 1031 Exchange.
What Qualifies as a Similar Property?
The properties being exchanged must be similar enough to qualify as “like-kind,” meaning they are of the same nature, character, or class. In real property exchanges, the like-kind qualification is very broad. Most real property will be considered like-kind to other real property, as long as both properties are located within the United States. Although personal property can be exchanged in a 1031 Exchange, the rules for like-kind qualification are much stricter than for real estate. Additionally, real property can never be exchanged for personal property, and vice versa. Certain types of property are specifically excluded from 1031 Exchanges, including inventory or stock in trade, stocks, bonds, notes, other securities or debt, partnership interests, and certificates of trust.
What are the Time Limits to Complete a 1031 Exchange?
You have 45 days from the date you sell the relinquished property to identify potential replacement properties. After the 45-day identification period, you have an additional 135-days to close escrow on the replacement property, constituting a total of 180-days to complete the exchange transaction.
How Do I Carry Out a 1031 Exchange?
I refer all my clients interested in 1031 Exchange to Rodney Fitzpatrick. He is the President & Founder of R.F. 1031 Exchanges LLC. You can call him at 831-901-8123, or email him at firstname.lastname@example.org to learn more about the 1031 Exchange process.
Before you begin your 1031 Exchange, consult your Tax Advisor or CPA. They are the most important person in planning your financial strategy of utilizing this portion of the tax code. They know your financial portfolio and they are in the best position to inform you about any tax consequence you may or may not incur with your property transaction.
When you are ready to begin the 1031 Exchange process, follow these easy steps:
- Fax a copy of the Purchase Contract, Receipt for Deposit, and Preliminary Title Report to R.F. 1031 Exchanges at 866-365-9822. Click here to download a Fax Cover Sheet.
- Call R.F. 1031 Exchanges at 831-901-8123 to confirm that they have received your fax transmittal.
- R.F. 1031 Exchanges will take care of the rest.