1031 Exchange Requirements

In a typical property transaction, the seller is taxed on any gain or profit received on the sale. However, a Section 1031 Exchange allows the tax to be deferred until a later date. When a property owner sells one property to reinvest in another property, Section 1031 essentially states that the person should not have to pay tax until the new property is sold. The taxpayer's property investment is the same, but the form of the investment has changed, say from an apartment building to a vacant lot of land.

Therefore no tax on the profit is charged until the new property is sold because the taxpayer is not really selling a property as much as he or she is reinvesting the value of the property into another one by the way of a sale.

There are many 1031 Exchange requirements that can make the process seem very confusing. It is always a good idea to use a tax specialist, attorney, or intermediary.

You legally must use a middleman, so you might as well use a top professional rather than the cheapest option. The exchanger must be sure that the property is used as an investment, or for trade or business. An exchanger cannot use a 1031 Exchange when selling their home to move into another home.

The 1031 Exchange process carries some tight deadlines including a forty five day Identification Period and a one hundred and eighty day Exchange Period. If these deadlines are not met, the entire Exchange Process can be in jeopardy, or at least become much more difficult. An exchanger cannot sell a property and then invest the funds into a property he or she already owns.

The exchanger should be sure that all of the proceeds from the sold or relinquished property go towards the purchasing of what is basically a replacement property. The replacement property must cost the same or more than the relinquished property. It is a good idea to locate and identify the replacement property before searching for a buyer of the property to be sold.

The 1031 Exchange is a very sensible allowance that the IRS gives us, and can allow property investors to make fair reinvestments without getting taxed twice. However, to make sure that no one uses the system to make fraudulent exchanges, the 1031 Exchange requirements are very tight and very controlled.

You should make sure that your middleman is a professional with a lot of experience with 1031 Exchanges. This helps the process move smoothly and quickly and helps keep you from having to worry. Hiring a top professional can cost you more money, but it is worth it because a less experienced professional can hamper the proceedings and can waste a lot of your time.

1031 Tax |