Who Would Know About The 1031 Tax Free Exchange
December 4, 2009 by Taxcut Editor
Filed under Personal and Business Taxes
Who Would Know About The 1031 Tax Free Exchange
So what is a 1031 exchange? It is when one person actually exchanges a particular property, or asset, for another particular property, or asset. It is basically trading one investment property for another investment property and it does not matter whether it is in an industrial, retail, office or residential sector. The 1031 tax free exchange is used as a tool for tax deferment and since many of the 1031 exchange laws have become a little more relaxed, many more people use it during an upswing in the real estate market, as there is the possibility of large capital gains after the property is sold. However, there are still some tough and complex rules that must be followed in order for the exchange to be approved.
At times there is some confusion as to what qualifies as a “like kind” type of property for a tax deferred 1031 exchange. Some examples of qualifying properties include duplexes, apartments, single family rentals, raw lands and commercial properties. For instance, you can exchange a single family rental for raw land or a commercial building or even apartments and they can be exchanged anywhere in the United States.
Some property owners are leery of attempting a 1031 tax free exchange as they believe that the sale of the old property and the acquisition of the new property must be completed at the same time. But in reality the 1031 like kind exchange is almost never a two party, or two person trade. Many are delayed exchanges that make use of the 180 days allowed to complete the transaction, from the sale of the one property to acquiring the new property. However, you only have 45 days from the closing of the sold property in which to advise the IRS of the replacement property’s identity.
The 1031 rules are applicable whenever you intend to sell a property that is not your primary residence (and follows the like kind rule), and you plan to purchase a property within 180 days after you close on the sold property.
Another attractive feature of a 1031 tax free exchange is that there is no limit on the number of properties that you can include in the same exchange. Of course, in order to retain some flexibility you may want to consider a separate one for each of the relinquished properties, but it is allowable to complete them at the same time.
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