1031 Tax Deferred Exchange – In Brief 

Introduction

A 1031 tax deferred exchanges allow real estate investors to defer capital gain taxes on the sale of a property held for productive use in trade or business or for investment. This tax savings provides many benefits including the obvious – 100% preservation of equity.

Benefits

  • Tax-Deferred – By doing a tax-deferred exchange, you can conserve your equity by not having to pay taxes on your net profits. Simply, you can reinvest all.
  • Consolidation – You can sell multiple properties and exchange one property or Vice-versa.
  • Change of asset – You can change the type of asset that you own, for an example you can sell a piece of land can buy other investment property. For an example you can sell a land and buy a duplex.

Rules

  • Reinvest equal or greater amount: To 100% defer tax your new replacement property must be equal to or greater than the net value of your current property. Net Value= Gross selling price less closing costs. For example you sell a property for $400,000.00 and closing costs are $60000.00, so net value of your sell is $340,000. Hence you must invest $340,000 or more cash in the new property you buy.
  • If you buy a property lesser than net value of property, you will be liable for paying the capital gains tax on the difference.
  • Only business or investment real estate such a rental property, vacant land or typical business properties etc qualifies for 1031 exchange. First and Second homes don’t qualify for 1031 exchange.
  • You must use a qualified intermediary
  • You have 45 days from the closing date of your property to identify 3 replacement properties, and the identification must be specific. It means you must provide address of the properties you identify not just the area. 
  • You must purchase one or more replacement properties by the 180th days of the closing of old property

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