1031 California Exchange

When real estate is exchanged by a property owner of one property in trade of another yet federal income taxes are not required on the transaction, it is a 1031 tax deferred property exchange.

There are a strict set of guidelines that must be followed in order to realize the benefits of this program, but they are very straightforward and can easily be understood.

The taxes on a property can be deferred on the profits of a sale between property owners of like-kind properties. The IRS refers to this type of transaction in the IRC (Internal Revenue Code) as the 1031 exchange.

The purpose behind that 1031 exchange is that it allows like-kind property sellers to purchase replacement property that is also like-kind as long as it is done within a specific time frame. The tax on the old property sale is deferred or is not recognized when the exchange is done per the Code and the Regulations. The tax will be deferred until the property that is acquired in the exchange is sold in a transaction that is taxable.

When a property owner creates a transfer of old property and receives new property in an exchange, and the exchange is structured so that it is the exchange of one property for another as opposed to the purchase of one property and the sale of another property, an 1031 exchange has taken place.

The exchange must be completed within 180 calendar days after the initial sales closes. During this period, the seller has 45 days from the close of the initial sale to name candidate properties and identify them according to standards.

If there are no new properties identified within that initial 45 days, the trust is liquidated. Additionally, the proceeds from the sale of the property will incur taxes at the current capital gains rate. This will also happen if there is no designated transaction that is completed during the 180 day period.

The regulations are strict but effective and as long as the parties adhere to these regulations, they will reap the rewards of a tax deferment on their property sales.

To many, a property sale and a property exchange may appear similar if not identical. However, in a property exchange, the exchangor is the seller and the appointment of an intermediary is mandated to make the exchange legitimate.

The regulations that are specified in IRS Section 1031, it is the exchange intermediary who must handle any and all monies that are generated by the property exchange. They are responsible for holding these monies in trust until the exchange has reached its completion.

The 1031 Exchange can be very beneficial to parties who adhere to the stringent rules and regulations that are attached to it. This type of exchange can offset substantial financial obligations that would be incurred by taxes stemming from the sale of the property. While this process may not be necessarily streamlined and overly time efficient, it is well worth it to those who would pay high taxes on the sale of their property.

1031 Tax |