- February 9, 2023
- Posted by: Gavtax gavtax
- Category: REAL ESTATE TAXES
Benefit: You get to pay nothing in taxes on a resulting gain, if the property exchange qualifies under Sec 1031.
Rule # 1:
Only business or investment property can be exchanged for a similar property. Example one rental property for another, a completed building for an undeveloped farmland.
Rule # 2:
Follow the 45 days and the 180 days deadline.
The property must be identified in writing within 45 days after the date of transfer of the relinquished property.
The replacement property must be received by the 180th day after the day the property was given up or the due date, including extensions of the tax return for the year in which the transfer of that property occurs, whichever is earlier.
Rule # 3:
A qualified intermediary must be used to facilitate the transaction. It’s not a DIY project.
Rule # 4:
Both the transferred and the relinquished properties have to be local which means within the United States. You cannot exchange domestic property for a foreign one.
Rule # 5:
Say two rental properties are exchanged by Mr. and Mrs. B. A’s property is more valuable than B’s. So B agrees to exchange her property and agrees to pay $10,000 in cash. Therefore, Mr. A must recognize $10,000 of gain he realizes on the transaction, even if Sec 10361 tax deferral otherwise applies.
Rule # 6:
Like Kind Exchanges are allowed between related parties, including between family members. However, if either party disposes of the property within 2 years, then the gain or the loss on the original 1031 exchange becomes taxable.
File form 8824 with the tax return for the year of the exchange.
- Inventory does not qualify for a 1031 exchange.
- Personal property exchange also does not qualify. e.g. One personal residence for another personal residence does not qualify.
- The exchange of cash for property is termed as a sale, not as an exchange.
- Related parties are defined as close family members, two entities in which the same taxpayer owns directly or indirectly more than 50% of each etc.