A 1031 exchange is sometimes called a like kind or starker exchange. It is in section 1031 of the US IRS code. The exchange allows property investors to defer payment of taxes on the capital gains of investment properties.
You can use a 1031 exchange many times without paying taxes until you sell your property for cash. Though it might look easy, getting a 1031 qualified intermediary such as firms like 1031 Exchange Place to guide you is essential.
Here are some of the rules your intermediary will help you navigate.
This rule states that the property being bought or sold under a 1031 exchange should be like-kind. This means that your replacement and original properties should be of a similar character or nature even if they differ in quality or grade.
You can, however, exchange one property for several replacement ones and vice versa provided they are similar.
45-Day Identification Period
As a property owner, you have 45 days after closing your first property to identify at most three like-kind properties for your swap. All your designated properties should still be sensible from a cash viewpoint. The 200% rule is an exception to the 45-day identification timeline rule.
This exception allows identification of at least four properties whose combined value does not surpass 200% of your original property’s value.
180-Day Purchase Timeline
This rule states that your replacement property should be received and your exchange completed in a period exceeding no more than 180 days. This period is calculated from the day of the property sale or income tax returns due date. Whichever of these two dates comes earlier is the applicable one.
The benefit of a 1031 exchange is that you defer taxes on the capital gains of your property sale. From the above rules, however, you will realize a successful 1031 tax exchange is not easy. Without a good 1031 intermediary, you might end up with losses from a depreciated replacement property and IRS lawsuits.