1031 Like Kind Exchange

A 1031 Exchange allows you to sell an investment property that you own and use the money generated from the sale to invest in another property without having to pay capital gains taxes on the profit generated. This is essentially an exchange of property where you trade one investment property for another.

The main stipulation is that the property that you buy must be of a like kind. What exactly this means is often misunderstood so many people like 1031 like kind exchange tax tips to make sure that they qualify for a 1031 Exchange.

A like kind 1031 Exchange means that you can only trade an investment property for another investment property. You cannot sell an investment property so that you can afford a larger house to live in and still qualify for a 1031 Exchange. In that case, you are selling your investment property for immediate personal gain and are generating taxable income.

Selling your investment property without reinvesting the money into a like kind investment property is in essence cashing out your investment, and that is a taxable event.

The reason that exchanging an investment property for another investment property is not considered taxable is that you are not really cashing out your investment property, but rather, trading one for another. This does not generate any taxable income, it just moves your assets around.

If you decide to go through a 1031 Exchange it is a good idea to identify potential replacement properties beforehand to make sure the 1031 Exchange process goes as smooth as possible and that you do not come on any delays in finding a new property. If you cannot identify a replacement property within forty fives days of the close of escrow on your relinquished property you may have to forfeit your 1031 Exchange and will have to pay capital gains taxes.

Some people wrongly think that a link kind exchange means the property you purchase as a replacement must be of the same type as the one you sold. For example, if you sell a vacant lot you have to buy a vacant lot in order for the exchange to qualify for the 1031. This is not true.

The term "like kind" only refers to the nature of the property in terms of it being an investment. You can exchange a vacant lot for an apartment complex, or an office building for a home to rent out.

When going through a 1031 Exchange you legally have to use a professional to serve as an intermediary between you and the IRS. This Qualified Intermediary will take care of the documentation to connect the sale of the first property with the purchase of the replacement property.

This Qualified Intermediary serves as an impartial third party to make sure the investor is not trying to cheat the IRS. The professionalism of this intermediary makes a big difference during the process, so the best tip anyone can give you is to use the best Qualified Intermediary you can find.

1031 Tax |