1031 Exchanges are a type of real estate transaction which allows investors to exchange property while deferring taxes. There are many rules and regulations associated with 1031 Exchanges. Adhering to the guidelines requires the assistance of a Qualified Intermediary (QI).
1031 Exchanges must meet specific protocol outlined in Section 1031 of the Internal Revenue Code. When entering into a 1031 Exchange, real estate investors are required to reinvest 100-percent of the equity into like-kind property of equal or greater value.
Two time requirements are imposed by 1031 exchanges and must be firmly adhered to. The first is referred to as the "Identification Period." Investors are required to identify a "Replacement Property" within 45 days from the transfer of "Relinquished Property."
The second time requirement is referred to as the "Exchange Period." This period starts when the relinquished property is transferred and expires within 180 calendar days. All 1031 exchanges must occur within the 180 day exchange period.
1031 Exchanges can only be used to exchange real estate and equipment held as investment property. Investments can include a wide range of real estate including raw land, commercial property, apartment buildings, and equipment used within the investor's business. Investment property must be exchanged for like-kind property. Real estate cannot be exchanged for equipment or vice versa.
Another requirement of 1031 exchanges involves the titling of property. This stipulation states replacement property must be titled the same as relinquished property. If relinquished property is titled in your business name, then replacement property must be titled the same.
The Qualified Intermediary is responsible for handling all aspects of the transaction. Careful consideration should be given to hiring a QI. One mistake can lead to substantial penalties and taxation.
1031 Exchanges prohibit the transfer of exchanging personal residences or vacation homes. However, if the property is held as investment property it can be exchanged for like-kind real estate.
Published on January 28, 2009 at 03:30 AM