Do you have investment property you want to sell? Are you going to purchase another piece of investment property? Then you might be interested in a 1031 Exchange. A 1031 Exchange allows you to sell one piece of investment property and “exchange” it for another while delaying taxes on the gains you might incur. The best way to find out if you are a candidate for this type of transaction is to speak with your accountant and attorney, but I can share some of the basics with you.
The property in question must be investment property. You cannot do a 1031 on your personal residence (there are other ways to save on those), your second home, or a home you bought to fix up and flip. It can be your rental property or investment property.
You will need to find a trusted Qualified Intermediary or QI to help in the transaction. When you sell your property the proceeds may not be paid to you, they must be paid to your QI who is acting as a “safe harbor” in the transaction. If the check is accidentally made out to you during the closing you lose your eligibility to participate in this type of tax savings.
Once the sale on your first property (relinquished property) is complete you will have 45 days to identify a new property (replacement property), to purchase. You must complete the transaction within 180 days. If for any reason you do not identify your replacement properties within 45 days you will not be able to access your money until the end of the 180 days. Your QI and I will be keeping you informed about the important non negotiable time line the IRS has established.
There are three types of exchanges, simultaneous, delayed and reverse. Simultaneous exchange is when you have already selected your replacement property and the purchase occurs immediately after closing on the sale of your relinquished property. A delayed exchange occurs when the replacement property is purchased between 2 and 180 days after the closing on the first property, this is the most common. A reverse exchange is when the replacement property is purchased and closed on before the relinquished property is sold. It can be done, however it is more difficult and more expensive to do a reverse exchange.
I hope the basic information I have provided answers some of your questions on 1031 Exchanges. You need a knowledgeable CPA, experienced attorney and an educated Realtor® on your team to assist in this process.
Kelly Harden, Realtor®
Century 21 Shaw Realty