Keep in mind that 1031 Exchange is processed under a strict timeline to identify and acquire replacement property, so the sooner you start looking for property, the better.
Strict adherence to the guidelines set forth within the tax code is required for a successful exchange. Investors should be aware of four basic requirements when entering into a delayed exchange, and should seek the advice of their tax accountant or attorney to ensure proper adherence to the tax code.
The internal revenue code requires that the properties involved in an exchange must be held for productive use in trade or business or for investment, and they must be “like-kind”.
The ‘like-kind” requirement is often a source of confusion for investors. All real estate is like-kind, with the exception of real estate outside the United States.
For example, provided the properties are within the U.S., an investor selling a rental home can exchange into a four-plex.
Dealer property, or property held as inventory does not qualify for an exchange. The most important factor in determining whether a property is dealer property or inventory is “intent”.
Upon an audit the IRS will take a careful look at what the investor intended to do with the property at the time of acquisition.
If the IRS feels that the intent of the investor was to quickly resell the property, it could be considered dealer property, or inventory, and ineligible for exchange
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Takes place when the property that you’re selling and the property that you’re acquiring close the same day as one another. Keep in mind that this exchange must be simultaneous in order for you to receive the benefits. If the closing of either property is delayed for a short period of time, the exchange could be disqualified, which means that you would need to pay full capital gains taxes.
most common 1031 exchange that you can make. When you conduct a delayed exchange, you will be able to relinquish or sell your investment property before you purchase another investment property. This allows you to use the funds from one sale to acquire another property. This type of exchange can’t occur until you’ve marketed your property, secured a buyer, and have executed the sale and final purchase agreement. A Qualified Intermediary will then need to be engaged to retain the proceeds of the sale until a like-kind property is acquired by the seller.
This is unique in that you find and purchase an investment property before selling your current investment property. Your current property will then be traded away. By purchasing a new property beforehand, you can wait to sell your current property until the market value of the property increases.
This a type of exchange that allows you to make improvements to the property before the actual exchange takes place. The property will be placed with a qualified intermediary for 180 days, during which you can use the exchange equity to make the necessary improvements. However, there are three separate requirements that you must meet if you want all gains to be free from taxes.
The information contained is provided for informational purposes only, and should not be construed as legal or tax advice on any subject matter. You should not act or refrain from acting on the basis of any content included without seeking legal or tax professional advice.
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