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The 1031 Exchange: The Key to Deferring Taxes when Selling & Buying Investment Property

Updated: Mar 15

Are you considering a 1031 exchange for your real estate investment? Let us guide you through this tax strategy that permits you to defer capital gains taxes when selling an investment property.


Disclaimer: The information provided is intended for informational purposes only and should not be construed as legal advice.



Buy sell

A 1031 exchange enables you to defer capital gains taxes by reinvesting the proceeds from the sale of a property into the purchase of another property. Some practitioners refer to this provision as a "like-kind exchange" with the “like-kind” referring to the type of property that is being exchanged. That is, real property must be exchanged for other real property, not personal property such as an automobile or equipment. Real properties are of like-kind if they are of the same nature or character, even if they differ in grade or quality.

 

The 1031 exchange can fail if you do not follow the strict rules and requirements the IRS has issued.  First, the property that you seek to sell must be property that is used in your trade or business or an investment property. It cannot be a principal residence or vacation home.


A Rider to the Contract for Sale and an Exchange Trust Agreement must be prepared and executed by the buyer, seller and Qualified Intermediary. before the first property is sold. In this Agreement, you agree that the sales proceeds will be held by a third party, called a Qualified Intermediary. The Qualified Intermediary or QI holds the sales proceeds in trust and will facilitate the purchase of the replacement property.


Once the initial sale is closed, you have 45 days to find and identify the replacement property.


The purchase of the replacement property must then close within 180 days from the date of the initial sale closing.


If the property does not close within 180 days, the 1031 exchange will be incomplete and capital gain must be recognized.

 

Our firm has the experience and knowledge to handle the legal aspects of your 1031 exchange, ensuring a smooth and successful transaction. Contact us today to learn more about how we can help you with your real estate and tax planning goals.

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