Legacy Investment Property Group is experienced in the 1031 exchange process. A 1031 exchange is a strategic real estate transaction in which a taxpayer is allowed to exchange one investment property for another by deferment of the tax consequence of a sale. The transaction is authorized by IRC Section 1031, which reads:
“No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment, if such property is exchanged solely for property of like-kind which is to be held either for productive use in a trade or business or for investment.”
To qualify as a 1031 exchange, the property being sold and the property being acquired must be “like-kind.” This means that both the original and replacement properties must be of the same nature or character, despite a difference in grade or quality. The IRS requires the net market value and equity of the property purchased must be the same as, or greater than the property sold. Otherwise, the taxpayer will not be able to defer 100% of the tax.
It’s also important that the taxpayer does not receive a “cash boot” in order for the exchange to be tax-free. Any “cash boot” received is taxable to the extent of the gain realized on the exchange. In other words, someone can carry out a partial 1031 exchange, in which the new property is of lesser value, but it will not be completely tax-free.
Timing is everything
The taxpayer has 45 days from the date the relinquished property is sold to identify the replacement property to be acquired in the exchange. If there are more than one property in the exchange, the 45 days are measured from the date the first property closes. It’s necessary that the replacement property is received and the exchange completed no later than 180 days after the sale of the exchanged property or the due date of the income tax return (with extensions) for the tax year in which the relinquished property was sold, whichever is earlier. Any missed timeframes will result in a 1031 exchange being denied by the IRS.
We can help
Our deep understanding and experience with the policies and procedures of the 1031 process allows us to provide accurate and timely solutions. From determining and managing an accurate timeline, identifying a replacement property and closing our team can assist you every step of the way and secure the financial success of the transaction.
When done right, 1031 exchanges can help with the upgrade in real estate investments and save taxes at the same time.
If you’re interested in learning more, you can call our team at 810-206-3500 or contact us here.