1031 exchange is an exchange that is used for deferring the capital gain taxes by using the 1031 exchange rules. 1031 exchange started its functioning from section 1031 of the IRC (Internal Revenue Code). In 1031 exchange process, the investor sells the property, hire an expert for the exchange, and reinvest the proceeds to buy a new replacement policy, and defer all the capital gain taxes.
The replacement and relinquished property for which the exchange is done must be used for business, productive work, or trade. 1031 exchange says that your first or personal residence cannot be exchanged under this.
The properties under the 1031 Exchange must be of like-kind properties. The definition of real estate properties includes commercial property, land , and residential property. The investor or the taxpayer can exchange personal property with personal property. (There are some modern standards rules surrounding this – for example, the livestock of opposite sex are not considered as like-kind property in the US).
At the point when the property is sale off at that time, the proceeds received from the sale of property must be reinvested in a like-kind asset within a period of 180 days from the date of exchange. Some restrictions are imposed on the number of properties that are recognized as potential replacement properties. More than one potential property can be recognized if you fulfill one of the below-mentioned 1031 exchange rules: