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Who Would Know About The 1031 Tax Free Exchange

When someone asks what a 1031 real estate exchange is, perhaps the simplest explanation is that it is when an investor can actually exchange one property or asset for another property or asset based on the Internal Revenue Service's rules, regardless of whether the property is residential, office, industrial or retail. The 1031 tax free exchange is used like a tax deferral tool, especially during a time when the real estate market is in a rapid appreciation, as the sale of a property during that time can result in high capital gains. While the IRS has simplified the process, there are still some strict guidelines that must be followed in order for the exchange to be approved.

At times there is some confusion as to what qualifies as a "like kind" type of property for a tax deferred 1031 exchange. Some examples of qualifying properties include duplexes, apartments, single family rentals, raw lands and commercial properties. For instance, you can exchange a single family rental for raw land or a commercial building or even apartments and they can be exchanged anywhere in the United States.

Many investors or property owners are under the impression that in order to qualify for a 1031 tax free exchange, both exchanges must be done simultaneously. However, that is not the case. In fact, the 1031 exchange rules allow for 180 days from the sale of the original property to the closing of the replacement property, but the replacement property has to be identified within 45 days of the closing of the sold property.

The 1031 rules are applicable whenever you intend to sell a property that is not your primary residence (and follows the like kind rule), and you plan to purchase a property within 180 days after you close on the sold property.

In order to keep some flexibility you may want to consider separate exchanges for every property that you are considering relinquishing in a 1031 tax free exchange; however, there is no limit to the number of properties that may be traded during one exchange, which many owners and investors do find useful, especially if they have several properties that they want considered in a short period of time.

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Tags: 1031 exchange real estate, 1031 exchange rules, 1031 property, irs 1031 exchange, real estate 1031, reverse exchange, section 1031 exchange