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Broadly stated, a 1031 exchange (also called a like-kind exchange or a Starker) is a swap of one business or investment asset for another. Although most swaps are taxable as sales, if you fall within the guidelines of the 1031 exchange rules, you'll either have no tax or limited tax due at the time of the exchange.
Disclosure: As a Realtor, Michael Penrod is not qualified to, nor is he attempting to provide tax or legal advise. You are encouraged to seek professional counsel when and where needed for your particular needs.
The Bottom Line on 1031 Exchanges
by Carmine Difulvio, Certified Exchange Specialist, First American Exchange Company
Below is a bottom line review of the basic requirements for successful tax deferral under Section 1031.
Defer payment of capital gains taxes.
PROPERTY THAT CAN BE EXCHANGED
Any real property.
Properties must be held for investment or in connection with a trade or business but do not have to be similar use (e.g. exchange raw land for an apartment building).
Thre are two parts to the transaction: "transfer" of relinquished property and "acquisition" of a replacement property.
FULLY DEFERRED EXCHANGE
Many criteria must be met in order to have a fully deferred exchange. Generally:
1) The taxpayer must buy replacement property(ies) of greater or equal value
2) The taxpayer must reinvest all proceeds from the sale of the relinquished property(ies)
3) The taxpayer must re-acquire debt equal or greater to debt paid off from the relinquished property (or replace the debt with additional cash).
There are two deadlines, both of which begin on the date of transfer of the first relinquished property:
1) Replacement property(ies) must be identified within 45 days
2) The exchange must be completed by the earlier of:
a) 180 days from the date of the first relinquished property closing; or
b) The due date of the taxpayer's federal income tax return, together with all extensions.
The replacement property must be unambiguously described, made in writing, and signed by the taxpayer.
The two most common identification rules are:
1) 3-Property Rule: Up to three (3) properties can be identified without regard to their fair market value
2) 200% Rule: Any number of properties can be identified, as long as their combined fair marketing value does not exceed 200% of the fair market value of all relinquished property.
SAME TAXPAYER REQUIREMENT
The taxpayer must acquire title to the replacement property in the same manner as the title was held in the relinquished property. There are some exceptions to this rule such as entities that are disregarded for tax purposes.
For additional information about the 1031 exchange requirements or to discuss your particular circumstances, please feel free to contact:
Carmine DiFulvio, CES
Senior Vice President
Certified Exchange Specialist
Toll Free: 800-337-1031
First American Exchange Company