Key Things to Know About Key 1031 Exchanges

If you’ve never had the opportunity to carry out a 1031 exchange before, it is imperative that you understand some of the basics so that you can ensure your transaction does indeed comply with regulations and award you the benefits of deferring capital gains taxes. To put it simply, a 1031 exchange is a swap of one business or investment for another.

Ultimately the tax will be paid only upon the final sale and this may be after multiple transactions. As it relates to property, a 1031 exchange is frequently used to sell one piece of property and identify and purchase a replacement property within a 180 day period.

A 1031 exchange cannot be personal property, although in some cases involving artwork this can be permitted. The definition of what is like kind property for an acceptable exchange is broad and a delayed exchange is fine so long as you use a qualified intermediary. The odds are quite slim that an exact buyer seller match up will prevail at the same moment which is why many people choose to use a delayed 1031 exchange with a qualified intermediary. The qualified intermediary applies and accepts funds on your behalf for the purposes of selling the first property and buying the second property.

In order to comply with IRS regulations, property has to be identified within 45 days and closed upon within six months. Knowing how to move forward in the role of the qualified intermediary place can help you have a successful 1031 exchange. Any cash leftover in the exchange is considered boot and is therefore taxable. One key is to evaluate debt in the exchange because a reduction in you obligations could be subject to tax.

Make sure you identify the appropriate qualified intermediary to help you with your exchange sooner rather than later. Hiring the right person should involve a mix of experience and his/her sense of professionalism. Do not make the mistake of hiring someone who does not have experience in this field as there is simply too much on the line to risk mistakes. Set up an initial interview with your preferred qualified intermediary so you can feel comfortable with working with him or her going forward- this first conversation can be extremely beneficial for determining your goals and feeling confident with the individual you have selected to help you. Don’t hesitate to ask for references, either.