Rules On 1031 Tax Deferred Exchange

2007-03-08 10:33:40

( Financial )



A 1031 tax deferred exchange allows you to delay the payment of capital gains tax that becomes due when you sell a piece of property. The 1031 tax deferred process can only take place if you purchase another piece of property, which has been acquired and utilized for investment, trade or business purposes. Properties, which have been used for personal reasons, will not qualify for a 1031 tax exchange.

There are certain rules that must be adhered to in order to be able to perform the 1031 tax deferred process:

Before considering an exchange under the 1031 tax deferred process, you must note that only properties that are located in the US are qualified for an 1031 tax deferred exchange.

When you purchase another piece of property, the value of the said property must either exceed or equal the price of the property you sold.

A qualified intermediary must be appointed to foresee the 1031 tax deferred exchange process. Qualified intermediaries must be hired before the sale of the existing property (relinquished property), and will be responsible for keeping the money obtained from the sale of your existing property in an escrow account until such time that the property which you have chosen to exchange (also known as the replacement property) has been acquired.

When the relinquished property is sold, you are given 45 days from the date of the sale of your relinquished property to propose three possible pieces of properties to purchase. You must purchase at least one of these properties within 180 days in order for the 1031 tax deferred process to be successful. You will not be granted any extensions for recommendations, or for purchasing the replacement property. Should you fail to comply with the above rules, the 1031 tax deferred process for the exchange will stop, and your money that was held in escrow will be returned to you. The capital gains tax from your relinquished property will be immediately due, along with the payment of the professional fee of your qualified intermediary.

Finally, any property that has been involved in the 1031 tax exchange process cannot be sold until two years after the date the exchange took place. Disposing of such property before the said period will make you liable to pay for your capital gains tax, which you owe immediately.


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