1031 MN

The IRS Definition of an Exchange

If you have ever stumbled upon http://www.IRS.gov you have probably seen that there is a wealth of information on there. Some people find the site hard to navigate or simply find that some of the information is a little difficult to understand. If you are someone that is interested in real estate investments, it is vital that you make sure that you are fully aware of all the laws, restrictions and taxes that you have to face.

Of course, you already know that you have to pay taxes on the properties that you sell, but what about if you are exchanging a property or two? Believe it or not, there is an exchange program set up through the IRS that allows a person to take the proceeds from the sale of a property and invest it into a new investment property that is equal to or greater than the fair market value of the property that sold.

Section 1031 is where you want to focus for such benefits. The 1031 tax exchange is fairly simple to complete but there are a few things that you have to know in order to make sure that it is something that you are going to be able to take full advantage of. The IRS definition of this exchange is the exchange of qualified properties, which will defer the capital losses or gains that would typically be due upon the sale. There are two basic types of exchanges under the 1031 tax exchange regulations. There is the simultaneous exchange and then there is the delayed exchange.

The delayed exchange does seem to be the more typically used but the simultaneous exchange does have its place. The simultaneous exchange is where a property is accepted as “payment” from someone purchasing his or her property, in lieu of a cash payment. There are still value rules that have to be adhered to which are clearly defined on the IRS website. Typically though, real estate investors who are selling their property are not dealing with someone who has a property that they want to take on.

The delayed exchange is perfect for these cases. The investor can sell his or her property and then shop for another, from a third party. The investor has forty five days from the date of the sale to identify the property that he or she is interested in purchasing and using for the section 1031 exchange. To identify the property, the investor must submit his or her intentions to the Qualified Intermediary in writing. It is important to note that the forty five days does include weekends and holidays. If you miss the deadline, you miss out on the tax deferment. There are no exceptions granted under the 1031 tax exchange rules.

But the forty five day timeline is not the only timeline you face. Once you identify the property or properties that you want to purchase in the exchange, you have only one hundred and eighty days from the sale of your property to purchase the new ones. It is a good thing that you are allowed to identify up to three properties of interest since the timeline is so strict. Even if you are only interested in taking on one additional real estate investment property, you will have options if something falls through. If the property you identified falls through and you are not able to purchase it, then you are not able to take part in the 1031 exchange if your forty five day period is up. If you identified more than one property during that time frame, you will be able to simply try to purchase another one from your list. This means that you should have no problem taking full advantage of the tax deferment benefits that come from the section 1031 exchange.

It is also important to know that the Qualified Intermediary holds on to the proceeds from the property you sold until it is transferred over to purchase the new property or properties. You also have to make sure that the property or properties that you take on are of equal fair market value of the property that you sold. They can also be worth more than the property you sold, they just cannot be worth less, otherwise, and they will not qualify for the section 1031 exchange.

When dealing with the 1031 tax exchange for the first time, you might want to look around for a little outside help. The last thing you want to do is to miss out on the tax deferment. Having to pay on your capital gains now could mess up the plans you have to reinvest into some more investment properties. The more money you have to purchase new properties, the larger and quicker your overall wealth will grow. Sure, you will pay taxes when the time is right, but for right now, you can take advantage of section 1031 and build upon your wealth.