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1031 Exchanges in Real Estate Law

Posted on in Property Taxes

If you are considering a 1031 exchange of real estate, it is important to understand what a 1031 exchange is and isn't, and to be aware of potential issues that could result in favorable tax treatment being denied. Real estate law is complex by itself; add in the element of tax law that comes with section 1031 exchanges and an unrepresented client could easily find themselves out of compliance with the strict requirements of the tax code.

Section 1031 exchanges are named for section 1031 of the tax code which, boiled down to its simplest, allows for property sellers to rollover gains into a new property, postponing the tax bill. There is no limit to the number of times a seller can rollover gains as long as the requirements of the law are met . Those requirements are:

  1. Like-kind property. The property being sold and the property being purchased must be used for the same purpose; that is to say that they either both have to be investment properties used in a trade or business. Property held strictly for resale will not qualify for section 1031 tax treatment; neither will primary residences qualify either.
  2. Identification period. The tax law specifies that the new property must be identified no later than 45 calendar days after the closing of the sale for the property that was sold .
  3. Purchase period. The purchase and closing of the new property must be completed within 180 calendar days from the closing of the property sold.
  4. Qualified intermediary. The proceeds from the sale of the property sold may not be touched or used by the seller in the period between the sale closing and purchase closing, and the law dictates specific requirements for who can be the qualified intermediary to hold the funds and prepare the required documents.
  5. Title requirements. The law is very specific about the fact that owner(s) of the purchased property must be the same as the owner(s) of the property sold.
  6. Equal or greater amount. The investment into the new property must be equal to, or greater, than the profit from the property sold.

Each of these requirements has its own nuances, so it is important to engage an attorney with experience in both tax and real estate matters when considering the sale and purchase of like-kind property. Contact us for more information about section 1031 exchanges.

Tagged in: Real Estate Tax Laws
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