What Is a 1031 Exchange?
A 1031 exchange, otherwise known as a tax deferred exchange is a simple strategy and method for selling one property, that's qualified, and then proceeding with an acquisition of another property (also qualified) within a specific time frame. The logistics of selling a property and then buying another property are practically identical to any standardized sale and buying situation. A 1031 exchange is unique because the entire transaction is treated as an exchange and not just as a simple sale. It is slowly making its way into daily conversation by realtors, title companies, investors and soccer moms.
Although most exchanges are taxable as sales, if yours meets the requirements of 1031, you'll either have no tax or limited tax due at the time of the exchange.The provision is only for investment and business property, so you can't swap your primary residence for another home.
Two key timing rules you must observe in a delayed exchange. The first relates to the designation of replacement property. Once the sale of your property occurs, the intermediary will receive the cash. You can't receive the cash, or it will spoil the 1031 treatment. Also, within 45 days of the sale of your property you must designate replacement property in writing to the intermediary, specifying the property you want to acquire. The IRS says you can designate three properties so long as you eventually close on one of them. You can even designate more than three if they fall within certain valuation tests.The second timing rule in a delayed exchange relates to closing. You must close on the new property within 180 days of the sale of the old. Note that the two time periods run concurrently. That means you start counting when the sale of your property closes. If you designate replacement property exactly 45 days later, you'll have just 135 days left to close on the replacement property.
There are countless scenarios involving 1031 exchanges with each and every one being unique with its own set of facts and circumstances. If you have questions or circumstances which you are uncertain of, consult an attorney who has experience and is knowledgeable with 1-31 tax deferred exchanges.
Contributed by Boatwright Law Firm