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Guidelines for the 1031 exchange of certain properties is not well
understood by most investors. This is the last great opportunities where real
estate investors can build wealth and save taxes.
Consolidation,
diversification, leveraging and relocation are all possible under 1031 without
being penalized for either capital gains or recapture. For real or personal
property to qualify, it must be a Like-Kind property with the same nature or
quality of the same kind.
One example
of this would be a property owner that would prefer to own a lease property
that does not require management. If the property however is not Like-Kind it
is considered a Cash or mortgage Boot. One way to avoid Boot is to trade higher
or bring cash to the closing to cover losses on the relinquished
property.
Once the
property closes, there are deadlines that must be met to qualify for 1031
exchange. An investor has 45 days to encounter a new property and 180 days
to complete the purchase.with no extensions allowed.
Replacement
properties can only be transfer by a Qualified Intermediary after they have
received written documentation describing the property. The new property
investment must be equal or more than the old property sales price. Three
rules constitute a replacement property including 95% rule, 200% rule, or
the Three Property Rule. These rules must be met or the property will be
disallowed.
Investors can
not take the sales proceeds with the 45 days during the exchange period. Only
after the expiration date may the investor take the receipt of the sale. If
during the 45 days the investor does not close on the property, 180 days must
elapse before taking the proceeds.
There are a
variety of ways to enter a
1031 tax exchange including Personal Property Exchange, Improvement
Exchange, Simultaneous Exchange, Reverse Exchange and a Delayed Exchange.
In order to
be properly vested according to 1031 Exchange rules, the person or entity that
initiated the exchange must be the same entity that ends the exchange. Personal
investors will absolutely not use their own bank account to hold sales proceeds
else the exchange will be disqualified.
.Guidelines
for 1031 Exchange At A Glance..
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The value of the relinquished property minus any selling expense must be
equal to the value of the replacement property must be equal to or
greater than
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In order to acquire the replacement property, you must use all of the
sale's net proceeds of the relinquished property
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During the exchange process, a constructive receipt of sales proceeds is
disallowed.
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Meet all deadlines requirements for identifying and closing on the
replacement property.
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