How To Complete a 1031 Tax Deferred Exchange
by Janet Wickell
What is the purpose of a 1031 exchange?
A 1031 tax deferred exchange allows you to roll-over all of the proceeds received from the sale of an investment property into the purchase of one or more other like-kind investment properties. At closing, proceeds are transferred to a third party--called a facilitator or qualified intermediary--who holds them until they are used acquire the new property.
A 1031 exchange is often referred to as a Starker exchange.
Exchanges Allow You to Delay Capital Gains Taxes
Capital gains taxes are deferred if all of the exchange funds are used to purchase like-kind investment property.
The deferment is like getting an interest-free loan on the tax dollars you would have owed for a cash sale. More equity is retained, and that helps you move into properties of higher value each time you perform a 1031 exchange.
What's Eligible?
A 1031 exchange is possible when you sell real estate held for investment purposes.
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It cannot be used for the sale of your personal residence.
Like Kind Properties
Exchanged properties must be like kind. For a real estate exchange this means real-property for real-property, but not necessarily land for land or a rental house for another rental house. Take a look at the IRS rules for specific information about what types of properties qualify as like kind.
You can exchange a single property for multiple properties, or purchase one property from the proceeds of several. Proceeds not used to purchase new investment property are taxed as a cash sale.
"In a like-kind exchange, both the property you give up and the property you receive must be held by you for investment or for productive use in your trade or business." -IRS
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