1031 Exchange

by : Santo Del Monico

The 1031 Exchange, from the Internal Revenue Code Section 1.1031 is a code that can end up saving individuals money on certain business and investment property transactions.

The 1031 Exchange allows sellers of some real estate and personal property to be exempt from paying the capital gains taxes if they are "exchanging" the property they sell for a new property of "like-kind". This code only applies to business property and investment property, not purely residential property.

An example would be selling a property used as an office for a business and buying a similar property that will be used as an office instead. Any profit made on the sale will not be taxed because it is to be used towards the purchase of the new property. The newly purchased property doesn't necessarily have to be the same type and size, but it has to be used for the business or investment purposes. Similarly, a property purchased for investment purposes can be sold to buy a different property for investment purposes, without taxing the profit. The broad definition of exchanging for a "like-kind" property allows for some flexibility.

There are further factors to be considered involved in the 1031 code. The purchase of the new property must take place within 180 calendar days of the sale of the original property. This gives individuals time to work out all of the details involved in purchasing and selling real estate. It is often more financially efficient to make the sale and purchase as close in time as possible. The 1031 code requires a qualified intermediary after 45 days of the sale to ensure that the gains are used towards the purchase of the new property. This prevents individuals from using the profit for their financial gain. Qualified intermediaries, however, charge fees for each exchange and additional properties.