1031 Exchange: Definition, Types & Rules You Need to Know!
Written Feb. 14, 2019 by Conor J. Green
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What is a 1031 Exchange?
A 1031 Exchange is
The Four Types of Exchanges
The exchange of the relinquished property (the property you sold) and the replacement property (the property you buy with the profits) and is executed simultaneously with a third-party intermediary.
When you sell the relinquished property and then acquire the replacement property. Using a third-party exchange intermediary, they will hold your proceeds from the sale of your relinquished property in a binding trust for up to 180 days. Within those 180 days you must close and purchase your new replacement property. You have 45 days to identify the property.
Also known as a forward exchange, it is when you acquire the replacement property before you sell your relinquished property.
Construction or Improvement Exchange
Where you can use the profits to go towards improving your replacement property while it is within the 180 day period. All improvements must be fully completed and the ending value of the home must be equal to or greater than it was prior to the improvements (easy enough right?).
Main Rules of 1031 Exchanges
- Must be a like kind property. All business and investment real estate property is valid, but it cannot be for example farm equipment for a duplex. A restaurant for a duplex is valid.
- Cannot be personal residence property.
- The replacement property must be of greater or equal value. Can be the sum of multiple replacement properties.
- Must be the same tax payer on the sale and purchase.
- You have 45 days to identify 3 potential properties that you would like to consider as your replacement property. You can identify a fourth IF the sum of the properties is not greater than 200% of your relinquished property.
- You have 180 days to purchase and close on the replacement property.
1031 Exchange Conclusion
It is a extremely valuable tactic, but little mistakes here or there could mean thousands of dollars becoming vulnerable to taxes. That is why most investors, even if they are familiar with the legal matters, opt to consult with a professional to make sure all paperwork is in order.
I wanted to make this one a quick one, because this topic can get can more complex and dry! Do you have a question after reading this or one we didn’t answer? Comment it below and I will answer it for you promptly!
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