1031 Tax Deferred Exchange
As an investor, there is a way to postpone paying taxes almost indefinitely. It is known as the 1031 exchange, like kind exchange, or a Starker tax deferred exchange. The object is to roll the proceeds from the sale of one investment property into the purchase of another investment property. There are several pitfalls that the investor conducting the exchange must be aware of to make this a successful transaction. Primarily, the entire amount must be rolled into the new property (or properties). Next the money from the exchange must be handled by a qualified third party or intermediary. Finally, there are time limits throughout the transaction that must be closely followed.
As mentioned the all of the proceeds from the sale must be utilized for investment in a future, qualified purchase. The IRS has no tolerance for splitting the funds for investment and personal use. If there are excess proceeds anticipated in the future purchase, the remainder money can be used to buy additional properties.
The money from the sale of the property is held in escrow by a third party exchange agent. The money must not be handled by the investor at any stage or the exchange will be voided. The intermediary will disperse the funds for the new acquisition according to the terms of the agreement.
From the time the exchange is initiated (sale of the original property), the investor has 45 days to identify the replacement property to be inducted into the exchange. More than one property may be identified but the investor must satisfy one of the following rules:
The Three-Property Rule - Any 3 properties regardless of fair market value.
The 95% Rule – An unlimited number of replacement properties if the fair market value of the properties actually received by the end of the exchange period is at least 95% of the total FMV of all the identified replacement properties.
The 200% Rule - Any number of properties as long as the total fair market value of the replacement properties does not exceed 200% of the total FMV of all of the exchanged properties from the initial transfer date.
Once the property has been properly identified, the investor now has 180 days to complete the transaction.
The guidelines for the 1031 exchange are very precise and there is no tolerance for deviation. For complete information on 1031 exchanges consult the IRS website or an attorney familiar with this exchange. Additionally, there are plenty of resources on the internet worthy of research prior to conducting an exchange.
Contact us for guidance on a like kind exchange to see if it is a fit for your real estate investment strategy.
