1031 Tax-Deferred Exchange

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<< Real Estate Tax Information for Home Sellers

While we are on the subject of taxes, I’m going to briefly mention 1031 tax deferred exchanges. The usual disclaimer applies – I am not an accountant, so please check with your accountant before planning to do a tax-deferred exchange. With a 1031 exchange, it may be possible for you to sell a property and defer paying taxes on any gain.

A 1031 tax-deferred exchange is known as such because 1031 is the relevant section of the IRS service code. It allows you to sell an investment property and then buy (exchange) it for another investment property. The properties need to be “like kind” – that is, both must be real estate, but you can for example sell a condominium and buy a farm, or sell a gas station and buy a duplex.

The property you are selling must be a property held for investment purposes – it cannot be a home you claim on your taxes as your primary residence. It may have been your residence in the past but should not be noted as such on your current or previous tax return.

When doing a 1031 exchange, you must disclose to the buyer that you are doing this exchange, as it does technically require the buyer’s cooperation, with a signature on a form or two. However, for practical purposes, the fact that you’re doing a 1031 exchange does not affect the buyer in any material way.

The tricky part about doing a 1031 exchange is that you must accomplish the transaction within strict time requirements. Within 45 days of the sale of your property, you must identify one or more replacement properties which you will be exchanging in to. And, within six months of the sale of your property, you must have completed the purchase of the replacement properties. If you fail to meet the time requirements, your 1031 exchange is invalid and you will need to pay the tax on the gains.

There’s a lot more to 1031 exchanges than this – so again, talk to your accountant. But do keep them in mind, as a 1031 exchange is the sensible way to sell one and then buy another investment property.

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