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Section 1031 is a section of the Internal Revenue Code that allows investors the option of swapping one investment property for another with little or no tax due at the time of the exchange. An investor can essentially change the form of his or her investment without “cashing out” or realizing a taxable capital gain. Exchanges not only protect investors from capital gain taxes, but can facilitate significant portfolio growth and increased return on investment.<\/p>\n
There are a few key requirements to the 1031 exchange taxpayers need to be aware of before considering incorporating it into an investment strategy.<\/p>\n
The section 1031 is not for personal use, it is only for investment and business property. The 1031 exchange may apply to a vacation home that is being used as a vacation rental investment property. If your vacation home is not being used as an investment that generates a revenue return, it may not<\/em> be utilized in a 1031 exchange, as that is considered to be personal real property.<\/p>\n Also known as an accommodator, a Qualified Intermediary is a company that holds the proceeds of the sale of the exchange property in a trust or escrow account until the purchase of new property takes place.<\/p>\n “Like-kind” is actually a very broad term. You can exchange an apartment building for raw land, or a ranch for a strip mall. A client of ours recently exchanged a ranch in Texas for a vacation rental investment property in Fawnskin. Although the rules are surprisingly liberal, it can have negative implications under some circumstances so always consult with a tax attorney or your CPA before executing a 1031 exchange.<\/p>\n In a tax-deferred exchange, taxpayers typically have 45 days from the sale of the old property to identify potential replacement property and 180 days to purchase the identified property.<\/p>\n2. Must use a Qualified Intermediary<\/h3>\n
3. Exchange must be for “like-kind” property<\/h3>\n
4. Timing rules apply<\/h3>\n
5. Always consult with your tax attorney or CPA<\/h3>\n