What is a 1031 Exchange?

Generally, if you exchange business or investment property solely for business or investment property of a like-kind, no gain or loss is recognized under Internal Revenue Code Section 1031. If, as part of the exchange, you also receive other (not like-kind) property or money, gain is recognized to the extent of the other property and money received, but a loss is not recognized.

A 1031 exchange is also know as a tax deferred exchange. A 1031 is an easy method for selling a property, deferring your taxes due on the sale by proceeding to purchase another property within a specific time frame. *Note both properties must “qualify” for the 1031 exchange program. A 1031 exchange purchase and/or sale is almost identical to a normal sale or purchase with the exception that the entire transaction is treated as an exchange and not just as a simple sale. The key word here is “exchange” and that is the difference with a 1031 exchange. You are actually “exchanging” one property for another which qualifies you to defer your tax owned on your gain from the sale. Basically the IRS will require taxes be paid on a sale and a 1031 exchange doesn’t require that the taxes be paid at the time of sale.

Section 1031 of the Internal Revenue Code is where the tax code is written to outline what is necessary for a successful exchange.

The 1031 exchange rule also lays down how the sale’s proceeds should be handled. The proceeds from the sale must go through the hands of a “qualified intermediary” (QI) and not through anyone else, or you will end up owing taxes. The entire cash or monetary proceeds from the original sale has to be reinvested towards acquiring the new real estate property. Any cash proceeds retained from the sale are taxable.

Timing is very important in a 1031 exchange, both identifying the property to purchase and selling the property you are exchanging.
There are 2 timelines that anybody going for a 1031 property exchange or (TIC) should be very much aware of.

The Period to Identify a Property : This is the critical time period during which the party selling a property must identify other replacement properties that he proposes or wishes to buy. It is not uncommon to select more than one property. This period is scheduled as exactly 45 days from the day of selling the relinquished property. This 45 days timeline must be followed under any and all circumstances and is not extendable in any way, even if the 45th day falls on a Saturday, Sunday or legal US holiday.

The Period to Identify an Exchange: This is the period within which a person who has sold the relinquished property must receive the replacement property. It is referred to as the Exchange Period under 1031 exchange (IRS) rule. This period ends at exactly 180 days after the date on which the person transfers the property relinquished or the due date for the person’s tax return for that taxable year in which the transfer of the relinquished property has occurred, whichever situation is earlier. Now according to the 1031 exchange (IRS) rule, the 180 day timeline has to be adhered to under all circumstances and is not extendable in any situation, even if the 180th day falls on a Saturday, Sunday or legal (US) holiday.

If you are considering a 1031 exchange you will need to have a Qualified Intermediary handle the exchange. Contact us and we can help connect you with a QI and assist you with buying and or selling in an exchange.