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The Important Requirements of a 1031 Exchange

Buying and/or selling a property seems easy. But when talks about taxes is involved, that is a whole new different story. Even so, having knowledge about taxes and its effects may come in handy. When you sell a property, for instance, and you wish to exchange it for another, it would help if you know what tax rules are associated with such exchange. If the transactions involve an exchange between two like-kind properties, you may qualify for a 1031 exchange.

The 1031 exchange refers to a section in the Internal Revenue Code that talks about transactions involving the exchange of one business or investment property for another. With this strategy, you may sell your income, business or investment assets and have it replaced with a property of the same kind. For example, you can exchange an office for a shopping center or an apartment building for an industrial building. To qualify for this, only like-kind properties that are held for business or investment purposes can be exchanged. Hence, exchanging your residence for an investment property, will not be qualified for this type of exchange. When you qualify to this type of exchange, you may have the chance to experience a tax deferral. Remember, for the exchange to be tax free, the two properties must be of the same type but not necessarily of the same quality.

When you qualify for a 1031 exchange, you should take note of its requirements. One of the most important rule to remember is its 180-day timeline. From the time you sold your old property, you will only have 45 days to identify potential replacement properties. You should take note that this will include all days with no exemption of weekends and holidays. You will be required to identify at least three replacement properties provided that their total value will not be greater than the double value of the property you sold previously. After the 45 days for identification of replacement properties, you will have a remaining 135 days to close the sale for one of the properties you listed. There will be no extensions and you have to pass the title before the 180th day.

You also cannot get hold of the money you earned for the old property you sold. A qualified third party shall hold it for you in a separate account until you have closed the sale of the new property. He or she is also responsible for preparing the documents required by the Internal Revenue Service for the exchange. Family members and business associates will not be allowed to take this role.

Other than the aforementioned requirements, it is also necessary to have the same taxpayer’s name listed in both titles of the old and the new property. Besides these requirements and information, you will have to know more about 1031 exchange. It would help to know more about this type of transactions when you seek the assistance of a lawyer who has adequate knowledge and experience in this matter.