1031 Exchange

What benefit is offered by a 1031 exchange? The payment of capital gains taxes may be deferred if investment properties are "relinquished and acquired" rather than sold and purchased. With a 1031 exchange, dollars which otherwise would be used to pay taxes--and are, therefore, gone forever--may be re-invested in the replacement property.

Regulations for a 1031 exchange specify that:
1. All properties involved in an exchange must be business or investment properties. A personal residence does not qualify.
2. The transaction must be an "exchange" rather than a sale of property for money followed by a purchase.
3. The exchanged properties must be "like-kind" properties. "Like-kind" properties are all types of real estate held for business or investment. They need not be of the same type, quality or number. For example, you would be permitted to exchange an apartment building in the city for two parcels of vacant land in the country.

Any "non-like-kind" property, usually cash or debt relief, is called "boot". Boot is taxable.

The most common form of exchange is a deferred exchange. A deferred exchange occurs when there is a gap in time between the date when one property is relinquished and the date when another property is acquired.

To fulfill the requirements of a deferred exchange, a qualified intermediary oversees the exchange and on behalf of the taxpayer. Strict regulations govern the procedures, documentation, participants, methods and time frames for identifying the property or properties to be exchanged, and the time frame for completing the exchange.

If you are considering an exchange, seek professional advice from your attorney or tax accountant, and call me for professional assistance in locating excellent investment properties.