What is a 1031 Exchange?
A 1031 exchange is a strategic process enabling investors to sell a qualifying investment property under the IRS guidelines outlined in the Tax Cuts and Jobs Act, Section 1031. The investor may then replace the original property with a similar one, thereby deferring the payment of capital gains taxes resulting from the sale of their initial investment. Additionally, it affords them the opportunity to reset the depreciation schedule, potentially reducing their future capital gains tax liability. Here are some basic rules of a standard 1031 Exchange:
Once an investor sells their property, the investor must deposit proceeds from the sale into a qualified intermediary, which will hold funds until the seller can close on a replacement property.
An investor has 45 days after closing to identify one or more “like-kind” properties to purchase with their proceeds. The property must be held as an investment for at least 2 years. The allowed value of these identified properties varies based on how they are identified:
If an investor identifies three (3) options as potential investments, those investments are allowed to be of any market value.
An unlimited number of properties may be identified if the combined value of these properties does not exceed 200%.
An unlimited number of properties may also be identified as long as the investor eventually invests 95% or more of the total value of the identified properties.
After the investor identifies the replacement properties, they have 180 days after the close of their original property to complete the purchase of their replacement properties. Any proceeds not used in the replacement purchase (the cash boot), is taxable.
