How to Qualify for a 1031 Exchange
In its simplest form, a 1031 exchange is defined as an exchange of property. It is a strategy used to defer the payment of taxes on capital gains. In general, this only applies to the sale of "like-kind" property for use in trade, business or investment. However, there are exceptions, and you can learn to understand what qualifies (and what does not) under the rules.
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Instructions
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Qualifying for a 1031 Exchange of Property
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1
Understand the intent behind a tax-deferred exchange. The purpose of any tax deferred transaction is to defer capital gains taxes, which can exceed 20 to 30 percent of the sale, depending on the federal and state tax rates of your local jurisdiction.
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2
Establish parity. The first rule of the exchange is that the value of the like-kind property must be equal to or greater than the sale price of the new property. That is, whatever property you want to buy must be at least the same value as the property you wish to replace. If the replacement property is of lesser value, there will be a tax liability.
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3
Use all equity gained in the transaction for the purchase of the like-kind property. That is, any gain from the sale of the old property must be used to buy the new property. If any part of the equity gained is not used for this purpose, there will be a tax liability.
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4
Qualify for a partial exchange. If either one of the previous rules is not met, you can still qualify for a partial tax deferral and only be liable for the tax on the difference between what does not qualify in Steps 2 and 3.
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5
Choose a qualified Intermediary (QI), which is the final consideration in qualifying for a 1031 exchange. The QI should be an independent organization or person whose sole purpose is to facilitate the exchange of funds and paperwork associated with the deal.
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Tips & Warnings
Make sure the QI selected is bonded and insured.
This article is not to be construed as legal or investment advice.
References
Resources
- Photo Credit www.lirealestateexchange.com
