1031 Exchanges, how do they work?

1031 Exchanges, how do they work?
by Steve Meyers
January 23rd, 2015

So…what is a 1031 Exchange and does it make sense for me to pursue this mechanism to defer my tax liability when I sell my property? Does my property qualify for a 1031 Exchange? What needs to happen to defer my tax liability into the future?

A 1031 Exchange is a method for deferring the tax liability on the sale of real or personal property into the future. Using this mechanism created by the IRS, you’re allowed to sell your real or personal property and not pay taxes on the Capital Gains if you re-invest the proceeds into another Like-Kind property within a specific period of time. This allows the owner to defer taxes they would have paid at the time of sale, to a later period when it is more advantageous to the owner. The common threshold is that if your tax liability is less than $10,000, there’s no real advantage to a 1031 Exchange.

What qualifies for a 1031 Exchange: Property that is held for a “trade, business, or investment” purpose qualifies for a 1031 Exchange. The definition of Like-Kind real property is very broad. For example, you can trade raw land for income property, a rental house for a multiplex, or a rental house for a retail property.

What does not qualify for a 1031 Exchange: Your primary residence or second home do not qualify for a 1031 Exchange.

The law requires you to work with a registered “Qualified Intermediary” to facilitate your 1031 Exchange.

To qualify for the 1031 Exchange you need to follow very specific rules and time-frames. You need to “designate specific properties” that you intend to purchase within 45 days of the sale of your property, known as the relinquished property. Here is a very simple explanation. If you intend to purchase between one (1) and three (3) properties, you must identify those properties within the 45 day time period and, you need to “Close” on any, or all, of those properties within 180 days from the “Closing” of the sale of your relinquished property. If you intend to purchase four or more properties (4+), you must identify all of those properties within the 45 day time period and, you must “Close” on all (100%) of those properties within 180 days of the “Closing” of the sale of your relinquished property.

If you have any comments or questions about this article, please email me at smeyers@kw.com. If you know of someone who would also like the information in this article, please forward it to them.

Steve Meyers is a Managing Broker at Keller Williams Realty in Seattle, Washington. He can be reached at (206) 972-3328 or smeyers@kw.com.

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