Who Would Know About The 1031 Tax Free Exchange
Many people are unfamiliar with the 1031 tax free exchange of properties. In layman’s terms it is a “like-kind” exchange, wherein a person is actually trading one particular asset (investment property) for another asset (investment property), regardless of whether it is in the industrial, office, residential or retail sector. Many people take advantage of this when real estate markets are in rapid appreciation, as it can result in large capital gains after the sale of a property. The IRS 1031 exchange is basically a tax deferment tool and many of the tax laws have become more simplified. It is not nearly as intimidating as it once was either; however, there are still some complex aspects to the rules.
At times there is some confusion as to what qualifies as a “like kind” type of property for a tax deferred 1031 exchange. Some examples of qualifying properties include duplexes, apartments, single family rentals, raw lands and commercial properties. For instance, you can exchange a single family rental for raw land or a commercial building or even apartments and they can be exchanged anywhere in the United States.
Many investors or property owners are under the impression that in order to qualify for a 1031 tax free exchange, both exchanges must be done simultaneously. However, that is not the case. In fact, the 1031 exchange rules allow for 180 days from the sale of the original property to the closing of the replacement property, but the replacement property has to be identified within 45 days of the closing of the sold property.
The 1031 rules are applicable whenever you intend to sell a property that is not your primary residence (and follows the like kind rule), and you plan to purchase a property within 180 days after you close on the sold property.
In order to keep some flexibility you may want to consider separate exchanges for every property that you are considering relinquishing in a 1031 tax free exchange; however, there is no limit to the number of properties that may be traded during one exchange, which many owners and investors do find useful, especially if they have several properties that they want considered in a short period of time.
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