A 1031 exchange is the act of making a likekind trade of two assets using certain IRS 1031 exchange rules. Under certain conditions, you can defer capital gains tax payments. This applies to different categories of asset exchanges, but one of the most common is real estate transactions.
Current 1031 Exchange Information Frequently Asked Questions
If you are considering a 1031 exchange, you probably have quite a few questions. Here are the answers to some of the most important IRS 1031 exchange rules.
What type of assets qualify for a like-kind exchange?
Any two properties that are set aside for business or investment use qualify for a 1031 exchange. The assets also are supposed to be equal in nature, character or class. However, the quality of the two pieces of real estate does not matter, and they do not have to be identical.
Any property meant for personal use such as a vacation home cannot be exchanged for commercial property. However, you could trade one piece of commercial real estate for another, and this includes swapping vacation homes rented by tenants. Offices, warehouses or production sites also qualify.
Who qualifies for a 1031 Exchange?
Usually, business or investment property owners can make a 1031 trade. This includes owners of a sole proprietorship, C Corporation, S Corporation, trust or partnership. Any other taxpaying entity such as a limited liability company also can set up a likekind business or investment property trade.
Are there any time limits for making a like-kind exchange?
In order to avoid a capital gain tax, you must identify a potential replacement property with 45 days of selling a relinquished property. The replacement real estate identification must be documented in writing, and this includes a legal description, street address, or distinguishable property name.
You also have up to 180 days after the sale of an exchanged property to receive the replacement real estate. Otherwise, you will be subject to capital gain taxes.
What types of like-kind exchanges can be made?
According to the LikeKind IRC IRS 1031 exchange rules, you can choose between three types of likekind transactions. IRS documentation further explains the differences between three 1031 exchange structures: simultaneous, deferred and reverse.
The simultaneous exchange is the swapping of two properties at the same time. Deferred exchanges allow you to surrender your real estate and later replace it according to IRS 1031 guidelines. A reverse exchange, on the other hand, allows you to acquire a replacement property through a likekind accommodation titleholder. This real estate is then parked for up to 180 days during which time the taxpayer disposes of the relinquished property.
More IRS 1031 Exchange Information
It is important to remember that capital gain taxes are deferred, not forgiven as many people would believe. You are required to track and calculate the basis of your property trades. A bonded and insured QI specialist could assist you further with the 1031 exchange legal process.