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1031 Tax Free Exchange Series

1031 exchanges are a great way to keep Uncle Sam out of your back pocket. 1031 simply is a section of the Internal Revenue Code which permits the deferral of capital gain taxes on the sale of property held for investment or productive use in a trade or business. A Forward Delayed Exchange is the most common. It involves the sale of one property and the proceeds of sale used to purchase another property of like kind. This must be accomplished with certain time constraints in order to qualify for the tax deferral. In addition to the time limits, the proceeds of sale must be held by a “Qualified Intermediary”. These exchanges are a valuable strategy in deferring federal capital gains taxes (15%), depreciation recapture (25%), and state taxes (typically between 8% and 9%).

A 1031 exchange is considered a safe harbor for exchanging property if it is done correctly. There are three easy steps.

Step One: Sale of your property. Before the closing of your property the Qualified Intermediary (QI) must complete basic exchange documentation. Once the property closes the proceeds of the sale must be delievered to the QI.

Step Two: Identify a Replacement Property. You have 45 days to identify a property or properties as the replacement property. You can identify up three properties as the potential replacement. Under some alternate rules you could identify more.

Step Three: Purchase of Replacement Property. You have a total of 180 days to close on the replacement property which includes the 45 day identification period. At closing, the proceeds held by the QI are then used to close on the replacement property and you receive the deed to the new property.

More to come in the days ahead on misconceptions, QI, what is like-kind, and many other topics surrounding 1031 exchanges.

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