A 1031 exchange, also known as a “like-kind exchange,” is a way for a taxpayer to defer paying taxes on the sale of an investment property by using the proceeds from the sale to purchase a similar property. The IRS Code 1031 allows for the deferment of taxes as long as the properties being exchanged are considered “like-kind.”
In order to use a 1031 exchange, the property being sold must be an investment property or used in a trade or business. The property being purchased must also be an investment property or used in a trade or business, and must be of “like-kind” to the property being sold.
Examples of “like-kind” properties include:
- Residential rental property for commercial office building
- Vacant land for developed land
- Apartment building for a shopping center
What doesn’t count:
Primary residence, vacation homes, fix and flip property will not count.
Also a LLC interest or stock in a C-corp, inventory or dealer property, foreign property for US property or other way around so a US property must be replaced with another US property and a foreign property must be replaced with another foreign property!
There are some restrictions and time limits on 1031 exchanges so it is important to consult a tax professional before proceeding with the exchange. Additionally, the use of a qualified intermediary is required for the exchange to be valid.
Those restrictions are for example you have 45 days deadline (calendar days which includes holidays as well) to identify a property to exchange with.
You must provide a list to your intermediary to indentify the list of possible properties for exchanges. It must be done in person via email or fax submitted on the 45 day midnight. You can add 3 properties normally but you can add as many properties as long as it’s not more than 200% of the sale price of property being sold. So if sell $800k then you can’t buy properties more than $1.6 million!
What to include in list:
Property specific address or area location description..
180 purchase deadline
You must purchase by the deadline as above days include holidays and weekends. No extensions.
Example if you sold Saturday June 28th then deadline is Christmas day Dec 25th so better to buy before Christmas.
If you sell two properties then 180 days is from the sale of the first property.
So if you’re buying multiple properties you must buy all properties within 180 days!!