10 Things to Know About a 1031 Exchange - Part 2

In a previous blog, I introduced you to some general concepts about 1031 exchanges. These popular transactions allow investors to defer capital gains tax when swapping business or investment property (real or personal). I also listed a few of the key things you need to know if you are considering a 1031 exchange.

Here are four more basics that you need to know before starting an exchange of your own.

Timing Matters

The IRS is very strict when it comes to 1031 exchanges. While they allow you to defer taxes, they also hold you to critical deadlines in order to do so. The first is known as the “45 Day Rule.” This rule requires you to identify your replacement property within 45 days of the sale of your relinquished property. Failing to do so will negate the exchange and taxes will be due.

All Exchanges Don’t Happen Simultaneously

One of the key benefits is that you can sell your current property and have up to six months to close on the acquisition of the “like-kind” replacement property. This is known as a delayed exchange. When you want to complete such an exchange, you will need the help of a qualified intermediary – the person who will hold the sale proceeds from the relinquished property and then “purchase” the replacement property for you.

Timing Matters (Again!)

In keeping with their strict requirements, the IRS also requires you to close on your replacement property within 180 days of the sale of your relinquished property. The clock starts ticking on the day you sell and runs concurrently with the 45-Day-Rule.

You Can Designate Multiple Replacement Properties

To make it easier to complete a successful exchange, the IRS permits you to name more than one replacement property. Of course, this is also subject to strict limitations. You can name up to three so long as you close on one of them within the requisite time limitations. Alternatively, you can nominate more than three if they adhere to a valuation requirement (the 200% rule).

If a 1031 exchange is in your future, visit our website to learn more about these powerful tax deferral tools and our qualified intermediary and replacement property locator services.