Four Rules For Your Next 1031 Exchange

When a 1031 exchange works, it works really well. Investors can defer capital gains tax when they swap one piece of real estate for another, “like-kind” parcel. Unfortunately, there are many ways that an exchange can go awry and negate the tax deferred nature of the transaction. To ensure your next exchange goes smoothly, keep these four rules in mind.

Leave Your Money In The Investment

If you take any money out of the transaction, it becomes “boot” and is immediately taxable. Generally speaking, you should keep all the money tied up in the transactions to enjoy full tax deferral.

Keep An Eye On The Calendar

The IRS loves deadlines and they’ve imposed several in the exchange process. Remember that you have 45 days to identify “like-kind” replacement property and 180 days to close on the replacement property. Miss either of these deadlines – even by a day – and the taxman is calling. Now.

Select Your Qualified Intermediary Very Carefully

Be sure that the QI (also called an accommodator) is thoroughly vetted and properly bonded and insured. This individual will hold the proceeds from the sale of your relinquished property, so make sure he or she is reputable and trustworthy.

Understand “Like-Kind”

While it doesn’t mean identical, the replacement property does have to be similar enough to satisfy the IRS’s rather ambiguous concept (no, they don’t provide an exact definition) of “like-kind.” If you are unsure whether the replacement property you are considering meets this test, consult with a professional experienced with 1031 exchanges.

To learn more about 1031 exchanges or our qualified intermediary and replacement property locator services, please visit our website.