How It Works

What is a 1031 Exchange?

IRC §1031 exchange, also known as a like-kind exchange, is a tax-deferred transaction that allows owners of investment or income-producing real estate to sell their property and acquire a replacement property or properties of equal or greater value, while deferring the payment of capital gains taxes.

 

Basic 1031 Exchange Rules

  • Qualifying properties

    Properties involved must be held for investment or income production, such as rental properties, commercial and industrial buildings, or land.

  • Tax savings

    Federal capital gains taxes from appreciation which is taxed at 20% (max), along with gain from depreciation taxed at 25%, and State tax at an average of 6% (depending on the State) can be deferred in a properly structured 1031 exchange.

  • Timing & Identification

    Within 45 days of selling the relinquished property, the seller must identify potential replacement property or properties. They have up to 180 days to complete the exchange by acquiring one or more of the identified properties.

  • Equal or Greater Value

    The replacement property must be of equal or greater value than the net sales price of the relinquished property being sold to avoid taxable ‘boot’.

  • Use of a Qualified Intermediary

    A Qualified Intermediary (QI) is used to hold the funds from the sale and facilitate the acquisition of the replacement property, ensuring compliance with IRS rules.

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