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1031 Exchange – What, Why and How

If you’ve only heard the term and don’t know what it is this will help. If you’ve never heard the term this will help you, too! It’s a brief, very brief, introduction to using 1031 Tax Deferred “Like Kind” Exchanges to defer any capital gains taxes you may have otherwise faced with the sale of a piece of real estate.

In the real estate investment industry I answer this question at least 2 or 3 times every week.

1031 exchanges must be administered by a Qualified Intermediary. You cannot hold the proceeds from the original sale – they must be placed in escrow by a Qualified Intermediary. I prefer and use Starker Services since it was Starker who first identified this tax opportunity and began to market his services commercially.

It does not have to be residential for residential or commercial for commercial exchange but can be mixed. Like kind, in this case, means real estate properties held for investment or for some other productive business use. Your personal property cannot be used in a 1031 exchange.

You have, as a seller who has placed the proceeds of a sale into the management care of a Qualified Intermediary, 45 days to identify the property you intend to purchase and 180 days to close on the sale. This is from the date of the sale of the initial property.

If you do not identify your property within 45 days or do not close on it within 180 days your exchange defaults and you will be responsible for paying the capital gains tax on any profits you earned on the sale at the rate of the tax on the date of closing.

Tax will eventually be due. Either you or your estate will one day pay the capital gains taxes on any profits you’ve realized through the sales of the property(ies) traded through the 1031 exchange tax deferment method.

If you have individual questions I’ll be happy to answer them.

Ken Cook – Nationwide Specialist – Information/Marketing – FHA Home Loans
678-439-8683