1031 Like-Kind Exchange: Key Points
During the housing gold rush of the early to mid-2000’s the real estate market was flooded with speculators. People with no experience in real estate were swooping in and buying condos, townhomes and single family residences, often sight unseen, with the sole purpose of flipping the property for a quick profit.
And it often worked.
Many of these investors took advantage of a tax deferral program under the Internal Revenue Code commonly known as a 1031 Like-Kind Exchange. Under a properly structured 1031 Exchange the profit from the sale of investment real estate is not taxed; provided the investor complies with certain guidelines.
During this period I handled dozens of exchanges a year, but then, like the market itself, the like-kind exchange business dried up. However, as the market slowly emerged from the crash, investors have returned and like-kind exchanges are becoming more prevalent again.
A 1031 Exchange is designed to encourage investors to continue investing in real estate by deferring tax otherwise due on the gain from the sale of an investment property. In general, there are three main requirements of a 1031 Exchange.
First, there must be an “exchange” of investment real estate, which essentially means you must sell an interest in an investment property and then use the proceeds from such sale to purchase an interest in another investment property. For example, you can sell a condo in the city and buy a farm in the country or sell a piece of raw land and purchase a building for your business; provided both properties are held for investment, and not personal, use.
Second, you must trade up in value and equity. While this can sometimes involve a complex calculation, in general terms it requires that the value of the replacement property must be greater than the value of the relinquished property and you must reinvest all of the proceeds from the sale. Third, you must purchase the replacement property within 180 days from the date you closed on the sale of the relinquished property.
These are the broad strokes of a very valuable tax deferral vehicle. If you have an investment property and are interested in more details about like-kind exchanges, please contact us.