How to Consider a 1031 Exchange
A 1031 exchange is a real estate tax-deferred transaction following IRS Code Section 1031. For a 1031 exchange to qualify as tax-deferred, like assets must be exchanged within a 45 day period from the sale of one to the purchase of the other. If the assets are not deemed the same type of property, tax consequences will result. Considering a 1031 exchange requires understanding like assets and how they qualify in an exchange.
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Instructions
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Review the asset being sold and make sure it qualifies. Example of assets that qualify are real estate, boats and farm animals. Examples of assets that don't qualify are stocks, bonds and commodities.
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Determine if the qualified assets being exchanged are "like-kind." This means they must have the same nature or character but may differ in quality. So a personal home can exchange for a personal home of lesser value but not a rental property of equal value. A bull does not have the same nature or quality as a cow and they are not like-kind assets. See the IRS page for exact determinations of like-kind assets.
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Calculate the date of relinquishing the first asset against the date of acquisition of the second. This is imperative since there is a 45 day window to complete the exchange to receive the tax-deferred benefit. This is imperative when escrow times can alter the finalization date of a purchase closing.
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Do the exchange through a qualified intermediary in order to not be considered a sell then buy, which is taxable. Cash proceeds must not filter through the owner or her agent. The qualified intermediary must be a neutral third party such as an escrow company not related in person or business to the individuals conducting the exchange.
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File taxes on any cash proceeds in excess of the exchange value. If the asset sold is valued higher than the asset acquired, this is a capital gain. If a capital loss exists in a 1031 exchange, it is not recognized by the IRS and is not credited on tax returns.
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