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Many people have no idea what a 1031 exchange is, but hear of it when it comes time to sell off property. This article is intended for those people. I have written this in the simplest way that I can so that it can be understood by all.

Before you can understand how a 1031 exchange works, you should first understand why they exist. They exist so that people can avoid losing money in form of capital gains tax when they sell one property with the intent to reinvest the proceeds immediately. A 1031 exchange makes it possible to defer the capital gains taxes. The term 1031 actually comes from the IRS code. The reason this was created was to encourage people to continue to reinvest their profits, thus helping the economy.

So now that you understand the purpose, you should understand a little bit about how it works. First, you are required by law to have what is called a QI. This is a 3rd party that is independent and serves as a Qualified Intermediary (hence QI). They are there to hold the profits from the sale of the first property that you sale until you invest it into another property(s).

There are certain things that will qualify and what will not qualify for a 1031 exchange. 1031 exchanges involve the sell and purchase of property. Most typically, this refers to property like single family rental units, multi-family rental units, office buildings, storage facilities, raw land, retail shopping centers, and industrial facilities. There are specific exclusions from 1031 exchanges, such as stocks and bonds. You should ask your QI about other exclusions before making any decisions on a 1031 exchange.

One of the main factors is that the properties need to be of like kind. Like kind is referring to the nature or characters of properties, not the grade or quality. Another factor in 1031 exchanges is that the properties must be held for productive use in trade or business or for investment.

The 1031 in 1031 exchanges actually comes of the Internal Service Revenue code. Keep that in mind because there are a lot of rules and regulations about how you can and cannot use a 1031 exchange. While it is always advisable to seek the guidance of a professional pertaining to your circumstances, there are some general guidelines that can help you understand the basics.

1- The value of the replacement property must be equal to or greater than the value than the old property that you are selling. 2- The equity of the replacement property must also be equal to or greater than the value of the old property that you are selling. 3- The debt on the replacement property must be equal to or greater than the debt of the old property that you are selling. 4- ALL of the net proceeds from the old property that you are selling must be used to acquire the replacement property.

There are also some timeline issues that you will want to be aware of. First, in order to successfully qualify for a 1031 exchange, you will need to identify a new property by the 45th calendar day from the time of the closing on the relinquished property. (There are guidelines about that too - see a professional) Second, you need to close on the new property by the 180th calendar day from the time of the closing on the relinquished property. Hopefully this helps. Please call a professional when you are getting ready to consider a 1031 exchange.

As you look around for more info on a 1031 exchange, keep in mind that some also call it a 1031 Tax Exchange. Always remember to consult a Qualified Intermediary before making any decisions.

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Tags: 1031exchange, business finance, Finance, Personal Finance

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