A 1031 Exchange, also known as a tax deferred exchange, is a real estate investment strategy to sell a property and transfer the equity into a like-kind property without paying any capital gains taxes until a later time. The tax is deferred. This allows for compounding of your investment dollars without taking a large tax bite and paying the tax upfront.
So, the investor avoids paying capital gains tax and is able to upgrade or purchase another investment property. A capital gain tax by the way is currently 15% and may be increased to 20% in future years. The IRS has provided this 1031 (sometimes called a Starker Exchange) technique to enable real estate investors to make investments and encourage re-investment of proceeds.
There are two major rules to abide by when doing a 1031 exchange:
·For full tax deferral, the total purchase price of the replacement "like kind" property must be equal to, or greater than the total net sales price of the relinquished, real estate, property.
·All the proceeds received from the sale, of the relinquished property, must be used to acquire the replacement, "like kind" property for a full tax refund.
There are 2 timelines that must be adhered to when doing a 1031 exchange.
·The Identification Period: This is an important period during which the party selling a property must identify other replacement properties they wish to buy. It is not uncommon to select more than one property. This period is scheduled as exactly 45 days from the day of selling the relinquished property. This 45 days timeline must be followed under any and all circumstances and is not extendable in any way, even if the 45th day falls on a weekend or US holiday.
·The Exchange Period: This is the period within which the investor who has sold the relinquished property must receive the replacement property. In other words, the investor must close on their "exchange to" property within 180 days. It is referred to as the Exchange Period under the 1031 exchange (IRS) rule. This period ends at exactly 180 days after the date on which the person transfers the property relinquished or the due date for the person's tax return for that taxable year in which the transfer of the relinquished property has occurred, whichever situation is earlier. Now according to the 1031 exchange (IRS) rule, the 180 day timeline has to be adhered to under all circumstances and is not extendable in any situation, even if the 180th day falls on a weekend or US holiday.
Please contact our brokerage for a free consultation on 1031 exchange strategies. Starting early is better and we can help formulate a custom strategy for your investment goals!
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