What is a tax free or 1031 Exchange?
A 1031 exchange, also known as a Starker Exchange, enables you to sell property and invest the proceeds into another without having to pay tax on the gain--you defer it. And you can keep legally doing this over and over again.
Reasons why people exchange investment real estate:
A 1031 exchange, also known as a Starker Exchange, enables you to sell property and invest the proceeds into another without having to pay tax on the gain--you defer it. And you can keep legally doing this over and over again.
Reasons why people exchange investment real estate:
- Defer taxes that would otherwise be paid in a sale.
- Acquire property using the equity of a previously owned property as the down payment.
- Increase basis and possibly qualify for more depreciation.
- Create a more favorable financing situation.
- Diversify a portfolio.
- Consolidate a portfolio.
- Move investments to another geographic area.
- Relief from property management.
The steps in the process are:
1. "Sell" your property.
2. Demonstrate your intent to do an exchange into like-kind property.
3. Proceeds go to a "qualified intermediary."
4. Identify your replacement property within 45 days of the sale of the old property.
5. Purchase the replacement property within 180 days of the sale of the old
property.
Three key points:
1. You may only exchange into like-kind property i.e. income producing real
property for income producing real property.
2. It is critical to monitor dates and deadlines to ensure you meet the test with the
IRS.
3. Have professional assistance including an accountant, tax attorney, REALTOR®, and a
"qualified intermediary."
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