How 1031 Exchange Works
Owners of Real Estate within the United States can exchange that
property directly for another property or through a qualified
intermediary with a 1031 exchange (or more accurately real estate
transactions that comply with Section 1031 of the Internal Revenue
code) tax
free, thereby deferring any taxable gain.
The 1031 exchange provisions allow you to
exchange investment property for other
investment property.
What is investment property?
That is any property held for investment, most likely raw land or
rental property. You can exchange any of these properties for raw
land or rental property in a resort or retirement location like ours. You can
exchange land for buildings or buildings for land or any combination
thereof. The philosophy behind a 1031
tax exchange is that as long as a real estate investment remains
intact, capital gains taxes should not be assessed.
The property you acquire must be used for income purposes for a
period of time, usually stated as 2 years. So, you could sell vacant
land or an income building and exchange into a home in the Oriental,
Chapel Hill or Pittsboro area, rent it out for 2 years with up to 2
weeks usage per year for yourself and then at the end of 2 years
convert it totally to personal use if you so desire. What a great
deal!
You could even go further and make this your permanent residence
and qualify for the capital gains exclusion of $250,000 per person
or $500,000 per couple. This is one of the best beneficial tax
regulations available. Contact your CPA or Exchange Company for
further details or contact us.
FOUR BASIC RULES OF
1031 EXCHANGES
- Property must be investment property
- Property must be exchanged for like-kind (investment) property
- Replacement properties must be identified within 45 days after
the relinquished property is transferred.
- The exchange must be completed (replacement property received)
by the earlier of 180 days or the tax return due date.
