A 1031 exchange allows an owner of an investment property or property used in a trade or business to sell that property and reinvest the proceeds in a property of equal or greater value without having to pay capital gains tax.
In a successful completion of a 1031 exchange, you are not exempted from paying the capital gains tax; you are deferring payment on the gain until the next time you sell the property. At that time, you can do another 1031 exchange, or you will pay the combined capital gains tax that you owe from any profit you have made on both properties.
By utilizing section 1031, not only do you avoid paying capital gains tax in the year of sale, but you are able to use the equity you would have paid in tax to purchase a larger property and potentially achieve a greater future gain.
In order to accomplish a 1031 exchange, an owner of investment property should use the services of a 1031 Exchange Accommodator. An Exchange Accommodator will prepare all the necessary paperwork, hold the exchange funds, and guide you through the process.
At a minimum, the Exchange Accommodator should be bonded and insured. The Accommodator should be a corporation that is in the full-time business of offering qualified intermediary services. It is very helpful if the Exchange Accommodator is professionally qualified to give tax advice. An Exchange Accommodator who is a CPA or an attorney will be able to help with complex transactions, aid your other tax advisors, and avoid the most common mistakes.
You have only 45 calendar days from the close of the sale of the Relinquished Property to identify your replacement property and 180 calendar days from the close of the sale to acquire a Replacement Property. It may be difficult to find a suitable property within 45 days. 1031 exchanges must be completed within these strict time limitations with absolutely no extensions, except for federally declared disasters.
If you must purchase a Replacement Property before you can sell your relinquished property, you must accomplish a “reverse” 1031 Exchange. The Accommodator must take title to either the property you are selling before you purchase the Replacement Property or the Accommodator must take title to the Replacement Property.
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