1031

A 1031 Exchange is a tax instrument to defer capital gains tax. Under Internal Revenue Code Section 1031, a property owner is not required to recognize a gain or loss on a property when making a like-kind exchange, or selling an old investment property and reinvesting the proceeds in a like-kind property. The 1031 exchange allows the owner to defer capital gains tax which incentivizes the owner to continue and improve on their real estate investments.

Rules of the 1031

Both properties, the one being sold and the one being purchased, cannot be lived in by the owner. Land and rental properties almost always automatically qualify.

It is mandatory that a Qualified Intermediary (QI) be used to prepare the legal documents and to hold the money between the sale of the old and the purchase of the new.

Form the date of closing on the old property, the owner has 45 days to identify the new property and 180 days to close. They must report this to the QI. They are not allowed to be extended and are based on calendar days with no exceptions for holidays.

The owner who sold the old property must be on title for the new property.

All funds from the sale of the old property must be reinvested in the new property and the taxpayer must buy a property of equal or higher value than the property sold. Any money taken during the exchange is referred to as the “boot” and is taxable.