Real Estate News

For Investors: Understanding the 1031 Exchange

Many people have the idea that 1031 exchanges are complicated; that there are exact, detailed rules that must be met. While the rules are different from what taxpayers are accustomed to seeing in other areas of the law, there really is a simple logic to them. Most of you remember the old law (which actually was repealed a couple of years ago) dealing with the sale of your personal residence. Remember? When you sold your old house, you had 2 years to buy a new house and as long as you bought equal or up, the gain rolled over from the old house to the new. That was Section 1034. Section 1031 sits right next to it in the Internal Revenue Code, and does the same thing for investment property that Section 1034 did for your personal residence (i.e. the gain rolls over from the old to the new). There are six differences between old Section 1034 and Section 1031 that you need to be aware of when you consider a 1031 exchange: 1. Both your "Old" property and your "New" property have to be investment property. Rental property, bare land or vacation homes are examples of investment property. If you meet this test, you can sell any type of property (say an apartment building) and buy any other type of property (say an office building). 2. From the date of closing on the sale of your old property, you have 45 days to come up with a list of properties you would like to buy. This is called your "45 day list" and we recommend that this list contain 2 or 3 potential properties. 3. Also, from the date of closing, you have 180 days to close the purchase of whatever you are buying. And what you buy must be included on your 45-day list. 4. You can not touch the money. By law, the money must be held by a "Qualified Intermediary" (sometimes also called an "Accommodator" or a "Facilitator") who is also responsible for the preparation of paper work required by the IRS to document the exchange. 5. Title has to stay the same. Whoever held title to the old property has to end up as the titleholder of the new property. 6. You have to reinvest all of your cash, and your new property has to be at least equal to the net sales price of the old property. If not, you pay tax on the difference. Follow these simple rules and you can enjoy one of the last loopholes in the tax code. Also See: Real Estate Exchanges Require Careful Scrutiny

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