5/27/2017

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1031 Tax Exchange

One of the most complex, talked about, read about, and yet, misunderstood laws pertaining to the sale of real estate is the IRS code 1031 tax exchange.

It is highly recommended that before you undertake such a transaction, a qualified real estate professional, tax attorney, or an escrow officer with 1031 tax exchange experience should be consulted.

A qualified 1031 tax exchange usually involves third party participants who agree in principal to the deferment of taxable capital gains to a later date and meeting certain other conditions as set forth by the Internal Revenue Service (IRS).

The standards prescribed for 1031 tax exchanges are listed below:

  • Property must be traded for one that is considered to be of like-kind quality.
  • Both properties must be somewhat similar in nature but not necessarily the same.
  • They may have different uses and may be located in different areas or surroundings.
  • A trade may take place involving a rural property and a city property.
  • An unimproved lot for one that is improved.
  • A rental property for a store front property.
  • There may also be a trade between leaseholds for business properties.
  • The exchanged properties in question must have had a history of productive use, such as a business or income producing entity.
  • The trade must have involved properties that were of equal or of greater value or equity, the difference being paid by the.
  • A trade in like-kind property must take place with a specified period of time. The identification of the new property must occur within 45 days of the first transfer and the transaction of the trade must be made within 180 days.
  • The exchange must take place with properties located in the United States.
  • The properties involved in the exchange must be held for at least two years. If either property is sold within the two year period, both parties are subject to tax consequences.
  • For reasons of proper taxation, the IRS takes a hard look at 1031 tax exchanges.

    There are advantages to the 1031 tax exchange as far as deferring tax liabilities, but there are also inherent disadvantages to this process.

    It is wise to understand tax laws and procedures before getting involved in such transactions, or as stated above, you should have someone else who is knowledgeable in the field of tax law guide you through the process.

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