A 1031 exchange, also known as a tax deferred exchange, is a strategy for real estate owners to sell one property and acquire another "like-kind" property deferring capital gains taxes. The benefit of this strategy is to defer the taxes, leaving the owner with more money to purchase another property. There are many rules and guidelines that must be followed in order to successfully complete this process. Here are those guidelines simplified:
- The Exchanger must use a Qualified Intermediary (QI) to prepare all necessary documentation and to hold the money during the exchange. It is important that this company be experienced and work full-time with 1031 exchanges. It is required by the IRS that the QI not be someone that the Exchanger has known or done business with prior to the transaction.
- The old property (relinquished property) and the new property (replacement property) must be "like-kind" and be used for productive purposes.
The Exchanger is given a limited time in which to complete an exchange. There are two extremely crucial periods.
- The Identification Period ~ The 45 day period that begins from the transfer of the sold property in which the Exchanger must identify the new property in writing.
- The Exchange Period ~ The 180 day period that begins from the transfer of the sold property in which the Exchanger must acquire the title to the new property.
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