In general, Section 1031 of the Internal Revenue Code allows an owner to exchange one property for another and defer payment of state and federal capital gain taxes. Both properties are to be of "like kind," that is, the properties must be either 1) held for productive use in a trade or business, or 2) held for investment. For example, single-family rental houses in California can be exchanged for an apartment in Arizona, or land in New Mexico can be exchanged for a commercial building on Texas. This flexibility helps property owners realize their investment objectives. By exchanging instead of selling for cash, owners can diversify or consolidate holdings, reduce management commitments, or improve cash flow. Over the long term, acquiring real estate through exchanges is an excellent method of building wealth. Section 1031 allows continued deferral of taxes on subsequent exchanges, which enables the owner to increase equity without the burden of capital gain taxes. Basically, the 1031 exchange is the sale of one property followed by the sale of another. It is critical that funds are held by a "Qualified Intermediary," that both properties are of like-kind, and the exchange time period requirements are met. Contrary to what most property owners envision, a 1031 exchange is rarely a simultaneous two party swap. In a typical exchange, a property is sold by Exchanger (seller) to any Buyer (Called Phase I). A Qualified Intermediary must be retained prior to this closing. The exchange funds should be held safely in a qualified exchange account. The IRS stipulates that the Exchanger cannot be in actual or constructive receipt of funds at any time during the exchange). When Phase I closes, the exchange period begins. The Exchanger has 180 days from the Phase I closing date to acquire the replacement property and must identify the replacement property(ies) within the first 45 days. Phase II is the acquisition of the like-kind replacement property, which must close during the 180 day exchange period. This information is not intended to replace qualfied legal and/or tax counsel. Every taxpayer should review their specific transaction with their own legal and/or tax advisors

---

---

E-Mail Us