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The 1031 Tax Deferred Exchange
There are two common situations where you can sell your home or other real estate and not pay tax on the gain:
  • If you lived in a home for 2 of the last 5 years, you do not have to pay capital gains on the first $500,000 of profit for married couples, or $250,000 profit for single homeowners. (Note there are exceptions to this rule if you are forced to move within 2 years because of a job relocation, change of health, or some unforeseen circumstance.)
  • If you own investment property, then you can avoid paying capital gains tax by performing a 1031 Tax Deferred Exchange. A 1031 exchange is a popular technique for leveraging the equity of investment property. With a 1031 exchange, you use the proceeds from the sale of an investment property to purchase other (typically more expensive) investment property, without having to pay any capital gains tax on the equity you gained from the original property.
  • The following list contains some of the very important rules that must be strictly adhered to when performing a 1031 exchange. (The IRS is unforgiving when it comes to the rules of a 1031 exchange, so it is important to follow them exactly!)
  1. Exchange of properties: You must use all of the proceeds from the sale of your original property to purchase other "like-kind" property.
  2. Identification period (The 45-day Rule): You have 45 days from the sale of the original property to identify the replacement property (the new property to be purchased). You can identify up to 3 replacement properties, although you do not have to purchase each of the 3 properties. Alternately, you can identify any number of properties as long as their total value is not more than 200% of the original property.
  3. Exchange period (The 180-day Rule): You have 180 days (or the due date of your tax return, whichever is earlier) to finalize the exchange and acquire the new property(s).
  4. The Intermediary: At no point in the process of a 1031 exchange can the taxpayer gain control of the proceeds of the sale of the original property. Therefore, an intermediary is used to handle the funds while the replacement properties are being purchased.
Disclaimer: The above brief description is not to be construed as legal or tax advice. Always be sure that you have proper documentation of all the actions you take in pursuance of your tax strategy. Consult your tax and legal advisors for more information.
Please feel free to contact me if you are interested in more information about performing a 1031 Tax Deferred Exchange. I will be glad to answer any questions you may have!