What is a 1031 exchange?

On Behalf of | Sep 2, 2022 | Real Estate Transactions

A 1031 exchange is a way for investors in real estate to trade properties so they can defer the capital gains tax on the property. There are some very specific requirements for doing this so you must ensure that you’re handling the situation properly if you’re going to take advantage of this tax break. 

The Internal Revenue Service’s requirements are very strict. Failing to abide by them could mean that you’re on the hook for the entire capital gains tax so double-check everything before you conduct the deal. 

Must be a like-kind property

The properties that are exchanged with a 1031 must be like-kind properties. This doesn’t mean that only an apartment complex can be exchanged for another apartment complex. Instead, it means that an investment property must be exchanged for an investment property of a similar value. 

Limits to the 1031 exchange

There are limits to the 1031 exchange. For example, the IRS requires that both properties that are part of the exchange are located in the United States. There are also very specific requirements for a 1031 exchange that involves a former primary residence or a vacation home. 

There are also time limits that apply to these situations. For example, you have 45 days from the sale date to designate replacement property. There are only 180 days after the sale of the initial property to close on the replacement property. 

Ensuring that you’re handling everything in accordance with the law is the only way that you can take advantage of a 1031 exchange without having to worry about it coming back to haunt you. Working with someone who can help you with this is beneficial so you can focus on other areas of life.