1031 exchange refers to purely residential home does not
Section 1.1031 of the qualify, whereas exchanging a
Internal Revenue Code which property that your business has
was passed in 1990. Normally, used for its office, or even one
when you sell all real and used simply for investment
personal property, the tax code diversification does.
requires the payment of the
Capital Gains Tax. That is to But simply selling your office
say, when you sell your office isn't enough to qualify you for a
for $100,000 more than you bought 1031 exchange. Rather, the code
it for, you must pay the gains also requires that that you
upon those earnings. However, simultaneously buy a property of
after the passing of a 1031 "like-kind." This does not mean
Exchange that is no longer that if you are selling a 2000
necessarily the case. sq. ft. office you must buy a
2000 sq. ft office. Rather, the
What types of Property Qualify? term is interpreted very loosely
to mean virtually any real estate
A 1031 Exchange allows sellers of held for productive use in a
some real and personal property business or for investment,
the opportunity to avoid paying whether improved or unimproved
capital gains taxes (which are can be exchanged for any other
15% plus state taxes) by property to be used for
"exchanging" their sold property productive business or investment
for newly purchased property. purposes. So, if you sell and
However, certain restrictions unimproved lot of land and
apply. The most important purchase an improved one or visa
restriction is that only business versa, this still qualifies, just
property and investment property as selling industrial property
applies. So, an exchange under a and buying rental resort property
does. The point here is that intermediary is intended
while "like-kind" is an important primarily to prevent individuals
restriction, it has been engaged in the exchange from
interpreted so broadly as to give using the time in between the
individuals a lot of free reign. sale and purchase of property to
their financial gain. Although
The Exchange the seller has up to 45 days to
set up the intermediary, the
When most owners envision a 1031 exchange is designed so that the
exchange they envision a seller should not profit from the
provision whereby they must buy use of the money before the
and sell the two properties on purchase of the new property is
the same week or even the same made. An intermediary serves the
day. But that is not the case. A judicial purpose of ensuring
tax-deferred 1031 exchange allows this. But it is important to
up to 180 calendar days between remember that the qualified
the sale of the first property intermediary charges fee for
and the purchase of the second. this. While these services can
But no matter the time between vary in cost depending on the
sale and purchase, a 1031 additional advisory services
exchange is required by the provided by the Intermediary,
Internal Revenue code to have a individuals interested in a 1031
"qualified intermediary" to exchange should expect to pay
manage the exchange. somewhere in the vicinity of $500
to $700 for the first exchange
A Qualified Intermediary and $200 to $400 for each
additional property.
The requirement of a qualified
About the Author:
Dan Johnson enjoys writing about 1031 exchange. Visit http://www.1031exchangelowdown.com/ to learn more.
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