The 1031 Tax Free Exchange

A 1031 exchange property deal involves a person changing an asset, or property, for another asset, or property; or as the Internal Revenue Service calls it, a “like kind” exchange, no matter whether it is in an office, industrial, retail or residential sector. One reason why people take advantage of this is that when the real estate market is in a rapid appreciation, the sale of a property can result in large capital gains and the 1031 tax free exchange acts as a tax deferment. Although there are still some complicated aspects to the rules of an exchange, the Internal Revenue Service has simplified them.

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.

Many investors or property owners are under the impression that in order to qualify for a 1031 tax free exchange, both exchanges must be done simultaneously. However, that is not the case. In fact, the 1031 exchange rules allow for 180 days from the sale of the original property to the closing of the replacement property, but the replacement property has to be identified within 45 days of the closing of the sold property.

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.

In order to keep some flexibility you may want to consider separate exchanges for every property that you are considering relinquishing in a 1031 tax free exchange; however, there is no limit to the number of properties that may be traded during one exchange, which many owners and investors do find useful, especially if they have several properties that they want considered in a short period of time.

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