A 1031 Exchange is a method of selling one qualified property and purchasing another qualified property, all within a certain time frame, for tax benefits. The sale and purchase are treated as an exchange. Under Section 1031 of the United States Internal Revenue Code, the exchange of certain types of property may defer capital gains tax due upon sale. A 1031 exchange allows a seller of an investment property to exchange “like kind properties” without paying capital gains on the profit realized from the sale of the property. Real property is generally like-kind to other real property. Different than the exchange of real property. For instance, stocks and bonds are expressly excluded. Almost any property, whether real or personal, can be used in a 1031 Exchange so long as it is held for productive use in a trade or business or for investment.
A 1031 Exchange requires the use of an experienced qualified intermediary such as First American Exchange. All monies are handled through the intermediary so that the seller does not touch the profits from the sale of the relinquished property and does not handle the funds for the purchase of the replacement property. A taxpayer has 45 days from the sale of the relinquished property to identify a new replacement property and up to 180 days to close on that property. There is no restriction on how long you must have owned a property to qualify for a 1031 Exchange.
A taxpayer can receive some of the funds from the sale of the relinquished property, but this is considered “boot” and will be subject to state and federal tax.
Form 8824 is used to report the exchange to the IRS.