First, this is a complex tax topic, and you'll never want to approach it without the advice of competent professionals. We are adept at the transactions and you will need a competent attorney also skilled in the process once you begin. To qualify as a Section 1031 exchange, a deferred exchange must be distinguished from the case of a taxpayer simply selling one property and using the proceeds to purchase another property (which is a taxable transaction). Rather, in a deferred exchange, the disposition of the relinquished property and acquisition of the replacement property must be mutually dependent parts of an integrated transaction constituting an exchange of property. Taxpayers engaging in deferred exchanges generally use exchange facilitators under exchange agreements pursuant to rules provided in the Income Tax Regulations.
(Not to be used as legal advice)
• Named after the IRS code that established it.
• Also called "like-kind" exchanges.
• Defer capital gains taxes if you sell a property and reinvest your profits into another investment property.
• Sell one property and buy another of equal or lesser value, and you may be eligible to defer capital gains taxes if you meet all of the rules tests.
• Both properties must be held for investment or business use.
• However, you can sell a house and buy land, as they're both real estate.
• Commercial and office properties apply as well.
• All of the sold property profit must be reinvested in the new property.
• Doesn't have to happen simultaneously, but there are limits on the time between transactions.
• Generally, 180 days is the time limit from the sale of one property to closing the purchase of the other.
• You have up to 45 days from the sale of the first property to identify a replacement property.
• Under the exchange rules, there is no limitation on the number of replacement properties. However, you are limited to identifying within 45 days either:
Three properties of any value – or -
Any number of properties so long as they don't exceed 200 percent of the value of the relinquished property
• It is a totally "hands-off" set of transactions for the investor. A licensed and experienced third party takes in the funds from the sale and dispenses them for the purchase.
• Done right, an investor can go for many years, rolling up properties to higher value properties while deferring capital gains.
• You can die and take it with you! If you leave a portfolio built this way to your heirs, they inherit the properties at the "stepped-up" value. This means that they will not owe any capital gains. You avoided them forever!