In this ever changing real estate market, many investors are considering tax-free exhanges as a way of deferring taxes on the sale of their investment properties. Under section 1031 of the Internal Revenue Code of 1986, the two most important rules that must be followed are:
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The total purchase price of the replacement "like kind" property must be equal to, or greater than the total net sales price of the relinquished, real estate, property.
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All the equity received from the sale, of the relinquished real estate property, must be used to acquire the replacement, "like kind" property.
Of course, there are many more rules required by the IRS to satisfy all requirements which is why it is very important to work with a qualified Realtor®, a Qualified Intermediary and Tax Advisor.
Your Qualified Realtor® will work closely with you during the three step exchange process.
Step One: Sell your current investment property.
It is important to state that you will be engaging in a 1031 exchange in the sales contract BEFORE closing. You must have a Qualified Intermediary receive the net proceeds at closing and hold the money until you close on the new investment property.
Step Two: Identify the replacement property.
You may identify up to three properties as potential properties, however Section 1031 of the IRS code requires you to identify the new replacement property within 45 days following the sale of the currently owned property.
Step Three: Purchase the replacement property.
You must obtain the replacement property within 180 days following the sale of the relinquished property. The Qualified Intermediary pays the closing costs and you receive the deed to the replacement property. One stipulation for deferring your taxes with an exchange is that, among other things, the replacement property must be of equal or greater value to the relinquished property.
Consult the  IRS website for additional information and tax tips involving a 1031 Tax Exchange, but more importantly work with 1031 exchange professionals to ensure compliance with the specific regulations as defined in the IRS code. Choose the right Realtor®, Qualified intermediary and Tax Advisor who specializes in this field.
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