What is an I.R.C. Section 1031 Tax-Deferred Exchange
It is an exchange of property held for productive use in a trade or business or for investment for other "like kind" property held for productive use in a trade or business or for investment.
1. What are the components of a tax-deferred exchange?
The exchanger must document thoroughly throughout the exchange that he/she is conducting a tax-deferred exchange. This documentation can easily be accomplished by utilizing an independent exchange facilitator.
Exchanger must designate replacement properties in writing he/she may purchase to replace the sold property within 45 days. Exchanger must close on new property within 180 days of sale of old property.
Exchange facilitator steps in and sells exchanger's initial property after the exchanger has approved the sale terms. Exchange facilitator then hold proceeds of sale for a period not to exceed 180 days. Once exchanger secures a purchase agreement on new property, exchanger facilitator steps in for exchanger and purchases the desired new property and arranges to deed new property to the exchanger.
2. Why should I exchange?
Exchange will defer federal, and in many cases, state taxes on appreciation and depreciation.
Exchange will acquire the right kind of investment property for your situation. You can exchange almost any type of real property for almost any other type of real property. Exchanging is remarkably flexible to meet your needs.
Exchanging builds a person's wealth. Selling an investment property with a taxable gain (combination of appreciation and depreciation) results in a federal tax liability of at least 20% of the gain. This can be entirely deferred. The result is deferred taxes remain in the exchanger's portfolio invested in another property more suited to the investor's current needs. Exchange costs are minimal.
3. How do I get started in an exchange?
Consult with your tax advisor and/or lawyer to determine if an exchange will help you build or maintain your wealth.
Find an exchange facilitator. Your advisors can help you find one, but they cannot be your facilitator. Provide information about the property you are exchanging to the facilitator A good facilitator will work with you and your advisors to thoroughly document your exchange.
4. Is an exchange hard or risky?
Except for the 45-day identification requirement, a tax-deferred exchange is no more difficult than selling and buying a piece of real estate.
The biggest risk is that upon IRS review your exchange is disqualified. If this happens, you owe the taxes you tried to defer. Following your tax advisors guidance and meeting timelines established by your exchange facilitator, your exchange will be successful.
Exchange facilitator holds your money while you search for and acquire your new property. Choosing a Certified Exchange Specialist eliminates any risk www.1031CES.org .