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    Last updated: 10/08/2008     

 

 Overview of 1031 Exchange

Why a 1031 Exchange?

Selling investment real estate can result in a large capital gains tax liability. Section 1031 of the tax code provides a way to defer capital gains tax on the sale of business or investment real estate.  Deferring tax means that you'll have more money to re-invest in qualifying replacement real estate, giving you increased investment leverage.  You could say that a 1031 Exchange lets you "invest Uncle Sam's money"!

Leverage is only one reason to complete a 1031 Exchange.  There are many other reasons for pursuing a 1031 Exchange including:  

  • Relocate Investments Geographically
  • Change Property Types (e.g., rental house to multi-family)
  • Increase Deductions
  • Simplify Management
  • Plan for Retirement
  • Improve Cash Flow
  • Consolidate or Diversify Holdings
  • Eliminate or Create Joint Ownership

Am I Eligible for a 1031 Exchange?

"Like-Kind" Property Rule:  To qualify for a 1031 Exchange, your property must be held for:

  • Productive use in a trade or business or for investment purposes, AND

  • Exchanged for "like-kind" replacement property held for similar purposes. 

Any real property is "like-kind" to any other real property, as long as it is held for business or investment purposes. For example, each of the following types of real property may be "like-kind" to the other types:  office building, raw land, rental house, condominium, and retail strip mall.

Value/Debt Rule:  Your replacement property must satisfy the following four rules:

  • The value of the replacement property must be equal to or greater than the relinquished property;
  • The equity in the replacement property must be equal to or greater than the equity in the relinquished property;
  • The debt on the replacement property must be equal to or greater than the debt on the relinquished property; AND
  • All net proceeds from the sale of the relinquished property must be used to acquire the replacement property.

45/180 Day Rules:  You must:
 

  • Identify your replacement property(ies) in writing on or before the 45th day after the closing of your first relinquished property; AND

  • Close the purchase of your last replacement property on or before the 180th day after closing of the relinquished property.