Section 1031 of the Internal Revenue Code allows an owner of an investment property to rollover the sale proceeds from a property sale into another like-kind investment property. 1031 property exchange allows the owner tax benefits on Capital Gains. 1031 exchange properties can be exchanged anywhere within the United States. Real estate can include land, rental and business property to quality for 1031 property exchange. Section 1031 exchange rule does not apply to exchanges of inventory, stocks, bonds, notes and other securities and certain other assets.
The 1031 real estate exchange rule came into enforcement in 1990. In an ordinary real estate sale transaction, the owner is taxed on any gain made on the sale of the property. With 1031 tax exchange, the tax on the sale is deferred till another property is acquired. Section 1.1031 contains details for turning a sale and purchase of real estate into an exchange transaction. The advantage of 1031 tax deferred exchange is that the property investor is protected against capital gains taxes and he is liable to increased return on investment due to portfolio growth. With a 1031 tax exchange, you must identify replacement property and intimate in writing to the IRS. The purchase of the new 1031 exchange property must be concluded in 180 days. 1031 tax exchange is often referred to as a Starker exchange.
- The complete 1031 exchange proceeds must be reinvested in other like-kind property, failing which the additional amount may be subject to Capital Gains tax.
- 1031 property exchange involves acquiring a replacement property with an equal or greater amount of mortgage. Any deficit in the reinvestment is taken as a gain (‘boot’) from the property sale.
- 1031 exchange rule specifies that an exchange of real estate must take place. Property must be exchanged for property through an intermediary.
- Capital gains taxes are deferred if all of the 1031 property exchange funds are used to purchase like-kind investment property.
- Compare services and costs of intermediate facilitators when opting for 1031 exchange of real estate.
- 1031 real estate exchange will involve additional escrow fees, attorney’s fees, accounting fees as well as the intermediary’s fees.
- Property acquired for immediate resale will not qualify.
- Property acquired as a personal residence or vacation home will not qualify.
1031 exchange rule
Most often, a 1031 real estate exchange does not happen simultaneously. Typically in a 1031 property exchange, the proceeds from the sale of an investment property are transferred to a third-party facilitator. These funds are held until they are used to acquire a new property. 1031 property exchange is not possible on residential premises. By availing 1031 exchange rule, an owner of an investment property can exchange property and thereby defer paying federal and state capital gain taxes. An investor can use the sale proceeds into more valuable real estate. 1031 exchange of real estate can be resorted to for diversifying into other properties or to consolidate into one larger property.
You can even get a partial 1031 tax exchange. In that case you plan to use only part of the proceeds of a 1031 property exchange. Another variation of the 1031 exchange of real estate happens when a replacement property is purchased prior to closing the sale of the relinquished property. This scenario is more likely in a seller’s market. In this case, the intermediary affects the exchange once the relinquished property is sold.
To effect a 1031 tax deferred exchange, you need to utilize the services of a qualified intermediary (QI) also known as a facilitator or accommodator. 1031 exchange services encompass escrow services and paperwork to ensure that the property exchange qualifies under 1031-exchange rule. It is essential to check the credentials of the intermediary before deciding on one. 1031 exchange services include facilitation of the property exchange complying with all government regulations. Your employee, attorney, accountant, investment broker or real estate agent are disqualified from acting on your 1031 property exchange.
1031 TIC exchange
A joint tenant in common property enables the average investor to participate in real estate previously reserved for large institutional investors. TIC (Tenant in common) property exchange is also possible under 1031 TIC exchange. Initial skepticism whether investment in TIC is permissible under 1031 exchange is now a thing of the past. TIC investments are popular among those seeking passive long-term income sans the hassles of property management.