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How do 1031 Exchanges work?

Generally speaking, a 1031 exchange is an exchange between one property for another. It allows an investor to sell a property, and then reinvest the proceeds gained into another property while all capital gain taxes are deferred. Under Section 1031 (a)(1) of the IRC Code, the exchange is considered a legally authorized transaction:

“No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment, if such property is exchanged solely for property of like kind, which is to be held either for productive use in a trade or business or for investment.”

While most types of exchanges are considered taxable as sales, an exchange that meets the requirements of IRS Section 1031 means there will be no or limited tax due during the time of the exchange.

With a 1031 exchange, you will be able to change the type of your investment without needing to cash out or recognize a capital gain. This will allow your investment to increase while it’s tax-deferred. 

You cannot use a 1031 exchange for personal use

A 1031 exchange only applies to business and investment properties, which means you’re not allowed to exchange your primary home for another one. There is however, a provision for exchanging a vacation home for another one, which can be done as long as certain guidelines are followed

Some forms of personal property may qualify

While 1031 exchanges mostly involve real estate, there are several types of personal property which qualify, so long as they are used for trade, business, or investment. A few examples of these include paintings, heavy machinery, and business assets

Exchanges of corporate stock or partnership interests are not qualified for 1031 exchanges.

Delayed exchanges

A standard 1031 exchange involves two parties who make a straight-up swap between one property and another. Finding someone else who would like to have the exact property you own (and vice versa) does not happen often, if at all, however. Because of this, most 1031 exchanges are either delayed or involve another party

In a delayed 1031 exchange, there’s a middleman who will hold on to the cash until one of the parties sells their property. A designated replacement property will be required within 45 days after a sale, which must be put into writing that specifies the property you’d like to acquire. The cash will then be spent in order to buy a replacement property for the one that just sold.

180 days for closing

In a delayed exchange, a seller is required to close on the new property in 180 days or six months after the sale of their former property. The closing of the former property marks the start of this period. If you designate a replacement property after 40 days for example, you will then have 140 days remaining to close on the designated replacement property

Searching forhomes for sale in Mt. Pleasant, S? Just get in touch with me at 843.568.1118, or send an email to robertjstaylor(at)gmail(dotted)com