1031 Exchange / 1031 Tax Exchanges

Written by admin on May 2nd, 2011

As a real estate professional currently involved in the real estate investment and development business, you understand that there are a number of ways that you can help your business succeed (as well as a number of ways that you can let your business languish). One of the best tools for any real estate investor, then, is the 1031 exchange. 1031 tax exchanges were designed by the IRS to allow real estate investors to defer payment of capital gains taxes while they are actively involved in the real estate marketplace. With a well-managed 1031 exchange, then, savvy investors can increase the value of their assets over time without paying taxes in the interim. Successfully managing those 1031 tax exchanges, however, requires strict adherence to a set of carefully designed rules.

All 1031 tax exchanges, for example, are subject to strict time limits. Your 1031 exchange clock begins to tick when you finalize the sale of your current property. From that point, you have a total of 180 days to complete the exchange. The exchange is counted as complete when you have legally received your replacement property (in other words, when your legal purchase is officially complete). In some cases, you may find that you have less than 180 days, as the period can also close on the date that your taxes are due for the year of the exchange (including extensions). Within that over-arching 180 days, the first 45-day period is known as the identification period. During the identification period, you must find and legally identify the replacement property that you wish to purchase. Your intent to purchase this property must be documented in a written, signed notice.

Another rule that is important to the 1031 exchange process is the rule of like-kind property. This rule is intended to preserve the integrity and intent of 1031 tax exchanges by guaranteeing that the replacement property you are purchasing represents the same type of investment to you that your original property did. Fortunately, the government’s rules for like-kind property are generous: you could, for example, exchange a multi-family apartment building for a tract of undeveloped land as long as it is clear that the properties represent the same sort of overall investment and business opportunity for you. The like-kind rule is simply designed to help ensure that investors use the 1031 exchange process in the way that it was intended.

In short, 1031 tax exchanges are a valuable tool for any person who regularly works with real estate for business or investment purposes. Completing them successfully, however, relies on strict adherence to a number of rules and regulations – so take care that your 1031 exchange falls within the rubric of acceptable transactions.

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