Tax Deferring Strategy for an Investment Property – 1031 Exchange

A 1031 Exchange, also called a “Starker Exchange” is defined under section 1031 of the IRS code. This allows an investor to “defer” paying capital gain taxes on investments that are sold if it is exchanged into a “like-kind” investment. You must exchange a property or business for equal or greater value., For example if you sell a 1M property you have to buy a property of 1M or greater. 

The following are the type of 1031 Exchanges:

  • Simultaneous Exchange
    • When the sell of property occurs on the same day as the purchase of the property
  • Delayed Exchange
    • Most common,when you sell a property before you have your next property identified or closed. The proceeds of sales must be held within the “third party”
  • Reverse Exchange
    • Also known as forward exchange occurs when you acquire a replacement property through an exchange before you sell the property you currently own
  • Construction Exchange
    • This allows the owner/taxpayer to make improvements on the replaced property using exchange equity.

The following are the 1031 Rules

  • Like-Kind Property
    • The original and replacement property must be of the same nature or character
  • Investment or Business Property Only
    • A 1031 exchange is only available for investment/business.
  • Greater or Equal Value
    • The new purchased property must have greater or equal value than the sold property.
  • Must not receive “Boot”
    • If you purchase a property of lesser value the difference is considered a “boot” and is taxable. This is legal but would be considered a partial 1031 exchange and would not be 100% tax deferrable
  • Same Taxpayer
    • The tax return and name appearing on the title property being sold, must be the same as the tax return and the title holder that buys the new property
  • 45 Day Identification Window
    • The property owner has 45 calendar days post closing to identify up to three potential properties of like-kind
  • 180 Day Purchase Window
    • The replacement property must be acquired and exchange complete no later than 180 days after the sale of the original property

DISCLAIMER: The information above is based on current tax code, which is subject to change and for information purpose only. The above information should not be considered to be tax advice. You should discuss your personal situation with your qualified tax and legal advisor. Serene Homes and Solutions, LLC is not making any professional recommendations regarding accounting, legal, real estate, or otherwise.

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