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A 1031 tax exchange, also known as a "like kind" exchange or a "tax-deferred" exchange, is a good way to save yourself some money by deferring the payment of capital gains taxes. However, there are several key deadlines and requirements that must be met in order to make the exchange. The 1031 exchange is explained below by a brief list of the steps involved. Step One — Discuss your proposed 1031 tax exchange with your real estate attorney and accountant. They will make sure that all of the requirements and deadlines associated with a 1031 exchange are explained to you, and will help you find a "Qualified Intermediary." Step Two — With the help of your legal and financial professionals, identify the qualified property you intend to sell, which we will call Property #1. For a property to qualify, it must meet certain requirements. One of the requirements is that sale of the property will result in capital gains. The property must also be held for investment or business purposes. Qualified property cannot be held as personal property (for example your primary residence). The properties exchanged must also be of a "like kind" — investment property for investment property. For example, exchanging a single-family home for an apartment building or commercial property would be permissible. Step Three -- Sell Property #1. Your "Qualified Intermediary" will be the named seller on the closing documents and the proceeds of the sale will be left in escrow with the "Qualified Intermediary." Step Four — Within forty-five days of the sale of Property #1, you must identify your potential replacement properties for the 1031 exchange and provide this information in writing to the "Qualified Intermediary." This deadline is not extendable under any circumstances. Even if the deadline falls on a weekend or a holiday, it may not be extended. If you do not identify replacement properties within this timeframe, your 1031 will fail. The cost of the replacement properties must also total at least as much as the capital gains you made on Property #1. Step Five — Within one-hundred eighty days of the sale of Property #1, you must purchase one of your identified properties. The escrowed money held by the "Qualified Intermediary" (the proceeds from the sale of Property #1) must be used to purchase Property #2. This deadline is not extendable under any circumstances.
Once you understand all the requirements for a successful exchange, a 1031 like-kind exchange can be a great way to save money by deferring the payment of taxes.
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