There are countless options when it comes to investment, including stock, bonds, gold, diamond, cryptocurrency, and others. However, real estate remains the most promising and preferred option for investors.
There are many benefits of real estate investment. Real estate is an excellent source of a steady income and offers long term financial security. Real estate also provides appreciation and is considered less risky than other investment options.
The only downside is once you decide to sell real estate, you will be liable to pay a substantial amount of capital gains tax. The more significant profit you made using the real estate, the higher will be the taxes.
This is where IRS Section 1031 comes to investor’s rescue.
What is 1031 Exchange?
A 1031 exchange, also referred to as a like-kind exchange, allows you to defer paying capital gains tax by swapping your existing property held for either business or investment purposes with a suitable like-kind replacement property.
1031 Exchange Rules
The basic rules for a like-kind exchange is –
- Sell your real estate investment property.
- Place the proceeds under the supervision of a Qualified Intermediary.
- Identify new replacement property/properties within 45 days.
- Close on the new property within 180 days using proceeds from the sale of your old property.
1031 transaction ensures that you purchase and sell real estate without handling any cash. Ideally, you’re swapping properties because the money never reaches you, the qualified intermediary holds it. IRS will approve of this process if you follow all the guidelines, and as a result, you will be able to defer capital gains tax.
1031 Exchange – Guidelines You Must Follow
- The relinquished property and the replacement property must be “like-kind.”
As per IRS properties are like-kind, if they are of the same nature or character, even if they differ in grade or quality.” Both properties must be held for business or investment purposes to qualify. Investors or developers who flip or re-sell properties do not qualify as their intent is resale, not investment.
- The replacement property must be identified within 45 days of closing on the old property.
Beginning the day after closing, IRS allows you 45 calendar days to identify a replacement property. There are no exceptions, including holidays. If you fail to formally file replacement property/properties with the IRS within the identification period, your transaction will be unapproved, and you will need to pay capital gains tax. You are allowed to choose a maximum of three potential new properties, and you must close on at least one.
- The replacement property must be acquired and closed before 180 days after the closing of the relinquished property.
A new property from the identification list must be acquired, and the title should pass by the 180th day. There are no exceptions to this.
- Exchange Process Requires a Qualified Intermediary.
A Qualified Intermediary is essential for the successful completion of a 1031 exchange. QI acts as a third party who sells your property, on your behalf, buys a replacement property, and then transfers the deed to you. Qualified Intermediary also holds the proceeds and prepares the legal documents to ensure that the exchange follows all the guidelines laid down by the IRS.
- The owner of the old property and the new property must be the same.
One of the basic rules of 1031 exchange is that the taxpayer who owns the old property must be the one whose name appears on the title of the replacement property.
- The new property must be of equal or greater value.
The new property must be of equal or greater value than the one which is sold, and the entire sum must be reinvested.
Engage our services for a profitable 1031 Exchange and defer Taxes
1031 Exchange allows you to churn the maximum profit out of your equity. However, the exchange process is complicated, and it works better if handled by expert professionals. We have more than 15 years of experience in managing highly profitable exchanges for our varied client base.
For assistance regarding 1031 exchange call – 888-993-2835 or email us at email@example.com