1031 Tax Exchange

How A 1031 Tax Exchange Works

If a 1031 tax exchange is completed the exchanger is able to defer payment of capital gains tax by reinvesting the proceeds of the relinquished property into a like kind replacement property.  In normal circumstances, investors would be required to pay capital gains tax when they sell a property, but under the section 1031 deferred exchange rules, this can be avoided.  To meet the requirements of the IRS, 1031 exchange properties must be of a like kind - either vacant land, rental, business or investment real estate. 

The 1031 tax deferred exchange rules are complex, but there are some basic criteria that must be fulfilled to qualify for a 1031 exchange.  The real estate in question must be held for at least one year and one day to meet the requirements.  It must be of a like kind and the exchange process must be completed within strict time limits.  During the 45 day Identification Period from the transfer of the relinquished property, a new replacement property must be identified.  Under the 1031 tax exchange rules the exchange must be completed within the 180 day Exchange Period time frame.

As well as the forward or deferred 1031 exchange, there are some other types of 1031 exchanges that can be set up depending on circumstances.  For instance, a Tenant in Common 1031 exchange gives a small investor the chance to own interests in larger residential, commercial or industrial investments.  In some situations, such as where an investor wants to secure a replacement property prior to selling the old one, a reverse 1031 exchange may be set up.

Investors looking for a way of deferring tax payments with a 1031 deferred exchange are advised to seek professional advice from a tax advisor or qualified intermediary who can advise on the options available in individual cases.