If you have an investment in real property that you want to sell, you may want to consider a like-kind exchange. The IRS authorizes like-kind exchanges under Section 1031 of the Internal Revenue Code.
A 1031 property exchange allows you to defer gain from the sale of real property if you intend to purchase a replacement property. To meet IRS requirements to qualify to defer your gain, you will need to ensure you complete the necessary elements of the transaction within the specified timeframes.
Designate the replacement property
If you decide to sell a property and invest in another, the transaction does not have to coincide. You can sell your property even if you have not yet found a new investment. The proceeds from the closing on your property get sent to a third-party intermediary. You then have 45 days to designate a new property to purchase as part of your exchange. Under IRS rules, you can list multiple properties as possibilities for the exchange as long as you complete the purchase of at least one of these properties within the requisite time.
Close on the purchase
After choosing your replacement property, you must complete the transaction to purchase the parcel within 180 days of selling your original investment. The periods for designation of the replacement property and completing the purchase are independent of each other, so you must make sure you comply with each deadline.
If you follow IRS requirements, you can use 1031 exchanges to build your real estate portfolio while minimizing the tax consequences.