A 1031 Exchange allows you to defer taxes on the sale of an income or business property. In order to qualify for a 1031 Exchange, you must adhere to the guidelines provided by the IRS. 1031 is the number assigned to the IRS Code Section that provides for tax deferred exchange of real and personal property.
1. Real Property Use-Both your old and new properties must qualify as investment or business use. If both properties pass this test, you can exchange nearly any type of real estate.
2. 45 Day Identification Period-You have 45 days from the closing of your sale to list the properties you may want to buy. There are no exceptions to this deadline.
3. 180 Day Exchange Period-From the sale closing date, you have 180 days to close on the purchase of one or more properties from the 45-Day list. Again, there are no exceptions to this deadline.
4. Qualified Intermediary (QI)-The IRS mandates that you use a QI to prepare the legal documents for your exchange. Because the QI must be independent, it cannot be your friend, employee, broker, or even your accountant or attorney. The QI also holds your money, so that you do not have access to it.
5. Proper Title Holding-You must purchase and take title to your new property exactly as you held title to your old property.
6. Reinvestment Requirement-To defer all of your capital gain tax, you must buy a property equal or higher in value than the one you sold. Also, you must reinvest all of the cash proceeds from your sale.
A 1031 Exchange is not for everyone. As with any major financial decision, it is best to seek the advice of legal and tax professionals in order to determine the best strategy for you. This information is courtesy of The 1031 Exchange Experts.
Are you ready for a 1031 Exchange? Want more information on what you would need for a 1031 Exchange? Give us a call at 602.391.8986 or contact us. Thank you.