1031 Tax Deferred Exchange - How To Qualify

2008-11-11 15:53:07

( Financial )



The 1031 tax deferred exchange or Exchange 1031 has been cited as the most powerful wealth building tool still available to taxpayers. It has been a major part of the success strategy of countless financial wizards and real estate gurus. Taking its name from Section 1031 of the Internal Revenue Code, 1031 tax deferred exchange allows a taxpayer to sell income, investment or business property and replace it with a like-kind property.

To qualify for a 1031 tax deferred exchange, the properties exchanged must be held for productive use in a trade or business or for investment. The properties exchanged must be of the same nature or character, even if they differ in grade or quality. Real properties generally are of like-kind, regardless of whether the properties are improved or unimproved. However, real property in the United States and real property outside the United States are not like-kind properties.

There are two major rules to follow for 1031 tax deferred exchange: One, 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. Secondly, all the equity received from the sale, of the relinquished real estate property, must be used to acquire the replacement like-kind property.

The sale of the relinquished property and the acquisition of the replacement property do not have to be simultaneous. A non-simultaneous exchange is sometimes called a 1031 Starker Exchange. However, there are two timelines that anybody going for 1031 tax deferred exchange should abide by and know.

Identification Period: This is the crucial period during which the party selling a property must identify other replacement properties that he proposes or wishes to buy. This period is scheduled as exactly 45 days from the day of selling the relinquished property and must be followed under any and all circumstances. It is not extendable in any way, even if the 45th day falls on a Saturday, Sunday or legal U.S. holiday.

Exchange Period: This is the period within which a person who has sold the relinquished property must receive the replacement property. 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. It is not extendable in any situation, even if the 180th day falls on a Saturday, Sunday or legal U.S. holiday.

The application of these principles will depend on the specific facts of each transaction. It is best to consult a competent tax advisor to determine how Exchange 1031 may best be structured to obtain your investment objectives.


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