A 1031 exchange is a type of tax-deferred exchange under section 1031 of the Internal Revenue Code. It allows a taxpayer to defer paying taxes on the sale of an investment property if they reinvest the proceeds into a similar “like-kind” property.
In other words, if you own a property that you want to sell, instead of paying taxes on the gain from the sale, you can use the proceeds to buy another property of equal or greater value. By doing so, you can defer paying taxes on the gain until you sell the new property.
There are specific rules and requirements that must be followed to qualify for a 1031 exchange, including:
- Both the property being sold and the property being purchased must be held for investment or productive use in a trade or business.
- The replacement property must be identified within 45 days of the sale of the original property.
- The replacement property must be acquired within 180 days of the sale of the original property or by the due date of the taxpayer’s tax return for the year in which the sale occurred, whichever is earlier.
- The purchase price of the replacement property must be equal to or greater than the sale price of the original property.
- The proceeds from the sale of the original property must be held by a qualified intermediary until the replacement property is purchased.
By using a 1031 exchange, investors can defer paying taxes on the sale of their investment property and reinvest the proceeds into a new property, thereby continuing to grow their investment portfolio. As always, businesses should consult with a tax professional to ensure that they are meeting all requirements for properly transacting a 1031 exchange. If you would like to talk to one our tax professionals, please follow the link and one of our experiences tax professionals will contact you regarding your eligibility or answer any questions you may have.