1031 Exchange Information

Section 1031 Exchange Information - Internal Revenue Code Section 1031 provides that no gain or loss will be recognized on the exchange of any type of business use or investment property for any other business use or investment property. 1031 Exchanges are not really exchanges in the context of two-party barter. Instead, they are typical sales and purchases that involve the same exact ingredients as any other sale or purchase, without the capital gains. The only real difference is the investor is increasing his selling and buying power by electing to avoid the drain of taxes under Section 1031 regulations. No other aspects of the transaction are affected.

Anyone who is thinking about selling a business use or investment property should consider affecting a 1031 Exchange. An Exchange offers the astute investor an opportunity to reinvest the federal capital gains that would normally be handed over to the IRS and put that money to work for himself. You work too hard to simply pay the tax without carefully considering this reinvestment option. Essentially, 1031 Exchanges should be thought of as an interest free loan from the IRS; one in which the principal may be increased through subsequent exchanges and may never require repayment, if you plan properly.

What types of properties qualify for a 1031 exchange? Both Properties must be held for business or investment use. Typically exchanges include rental property or property used in a business. Land will qualify for a 1031 exchange. Your use of both the relinquished property and replacement property must be investment or business use.

The person or Exchangor doing the exchange must use a qualified intermediary to facilitate the transaction. One of the safe harbors of the regulations is to use a qualified Intermediary. The sale of the relinquished property and the acquisition of the replacement property must "flow" through the Intermediary. This is done through direct deeding to avoid duplicate transfer taxes. The qualified Intermediary may not be the taxpayer or an agent of the taxpayer (realtor, attorney, tax advisor, banker, accountant, employee, etc.) or lineal descendant of the Exchanger.

The Exchangor must adhere to certain time limitations - If the Exchangor does not have a replacement property ready to purchase, the Exchangor must identify the replacement property within 45 days. The 45-Day Identification Period begins at the closing of the relinquished property and requires the identification of like-kind replacement property. If a like-kind replacement property has not been properly identified to the Intermediary by midnight of the 45th day, the Exchange will not work and the taxpayer will be unable to defer the capital gains. Now that the Exchangor has identified their replacement property, they have 180 days to close on the replacement property. The 180-Day Exchange Period runs concurrently with the 45-day Identification Period and requires the acquisition of at least one of the identified replacement properties.

If you would like more information on 1031 exchanges, please go to our main website at www.1031company.com or call us at 239-333-1031. This page is for information purposes only, the Exchangor should consult their tax advisor for detailed information regarding their specific situation.