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1031 Real Estate Exchange

1031 Real Estate Exchange

In a typical transaction, a property owner is taxed on any gain he or she realizes from the sale. Through a 1031 exchange, capital gains tax can be deferred until a future date.  This exchange is a method for selling one qualified property and acquiring another within a specific time span. The transaction is recognized by the IRS as an exchange, rather than a simple sale.  Since the transaction is recognized as an exchange, the taxpayer qualifies for deferred gains treatment.  Simply put, sales are taxable by the IRS and exchanges are not.

There are six major rules to 1031 exchanges:
1. Both the old (relinquished) property and the new (replacement) property must be investments used for trade or business. You must substantiate your request with the IRS.

2. There is a 45-day identification requirement. From the day of the sale of the old (relinquished) property, the taxpayer has 45 days to compile a list of properties they want to buy. Typically, the list will have three or fewer properties.
3. 180-Day Purchase Requirement. From the day of closing, the taxpayer has 180 days to purchase another property. The 45-day identification requirement coincides with the 180-day purchase requirement. When the 45-day requirement is up, the taxpayer has 135 days left to purchase.
4. Qualified   Requirement. Taxpayers are not to touch the money between the sale of the old property and the purchasing of the new one. Taxpayers, by law, must use an intermediary to handle the exchange. The intermediary has to be a completely independent party that will hold the proceeds from the sale until the purchase.
5. Title Requirement. The tax return that holds title to the old property must be the same as the tax return that acquires the title to the new property.
6. Reinvestment Targets. In order to defer all capital gains tax, the taxpayer must purchase a property of equal or greater value. In order to pay zero sales tax, the buyer must purchase a property of equal or greater value and reinvest all of their cash proceeds from the first sale.

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