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1031 Tax Free Exchange

1031 Tax Free Exchange

A 1031 Exchange is a way to sell one property, that's qualified, and acquire another qualified property within a specific time frame. A 1031 exchange  is different because the entire transaction is treated as an exchange, not a sale. and allows the taxpayer to qualify for a deferred gain treatment. Sales are taxable with the IRS and 1031 but exchanges are not.


The important thing to remember is that 1031 exchanges do not render profits from capital gains tax free, they just provide a deferral of taxes. 

 

The "Equal or Greater Value" rule states that the thing you buy as a replacement to complete the exchange must be of equal or greater value than the property you sold. Otherwise, whatever portions of the proceeds of the sale are not reinvested will be subject to capital gains tax in that tax year and they don't get covered by the deferment.


The "Like Kind" rule means both properties must be in United States, but such diverse property types as apartment buildings, single-family homes, business property and undeveloped land all qualify. You can even trade a property for multiple properties or vice-versa. If you hold a long term lease (for more than 30 years) and have options to renew that may be exchanged for a fee interest.


"Time Frames"- You must identify (in writing properly executed) the replacement property within 45 days of sale and close on it within 180 days of sale of your prior holding. The investor must NOT take possession of the proceeds of the sale to be exchanged. Those proceeds must be held in a trust account by an independent qualified intermediary third party.