1031 Tax Exchange

The Tax-Deferred Exchange is a process that allows a taxpayer to exchange an investment or business property and defer the payment of the capital gains tax.  Normally there is a delay between settlements of the property being relinquished and the replacement property.

Criteria for the Tax-Deferred Exchange include:

• Properties must be like-kind.
• The property being relinquished must be used as an investment or business property; however, it is not important how the buyer plans to use the property.
• The replacement property must be identified in 45 days, be located in the United States and be settled in 180 days.
• It is not important how the property is currently used, only that it will be used by the exchanger as an investment or business property.
• Examples of like-kind investments or business properties include townhouses, rentals, land, farms office condos, warehouses, vacation rentals, etc.

Potential capital gains that are eligible for deferment are the profit plus all depreciation taken on the property being relinquished.

To be totally tax free, the acquisition cost of the replacement property must be equal to or greater than the adjusted sales price of the relinquished property. The total cash equity (equity less selling costs) from the relinquished property must be reinvested in the replacement property. Any cash proceeds not reinvested (known as “cash boot”) is subject to capital gains tax.  The replacement property must have mortgage debt or new cash added, equal to or greater than the mortgage paid off or assumed on the relinquished property.

The 1031 option is an avenue that more and more investors are utilizing. There are additional conditions and requirements to the 1031 Tax Exchange and you need consult with a certified 1031 Tax specialist.