Section 1031 is a provision in the tax code that allows you to defer your recognition of gain of taxes when you're selling investment or business property, typically through a qualified intermediary.
What Property Does & Does Not Qualify for 1031 Exchange
A litmus test to see if you qualify for 1031 treatment is that both the property being disposed of and the property being received has to be real estate that's held for investment or business purposes or for use in your trade.
Things that don't qualify for 1031 exchange include flipped properties or personal use properties like your home, your cabin, or a second home that's used primarily for personal use. Those types of property don’t fit into the paradigm of 1031 exchange.
Another interesting facet of a 1031 exchange is that it is an exchange. That means the same taxpayer that sold the relinquished property has to be the taxpayer that receives and completes the circuit by acquiring the replacement property. It's an exchange of asset A for asset B.
1031 Exchange Obstacles
Mechanically, there are some potential barriers or obstacles to doing a 1031 exchange that are written into the regulations. One such obstacle is that you have to identify the replacement property within 45 days after the date of the closing of your relinquished property and you have to receive the replacement property within 180 days of the disposition of the relinquished property. These two timelines run together after the date of closing of the relinquished property.
In a hot real estate market it is hard to find replacement property and that 45 days goes quick. When we talk about estate planning we need to be thinking like a chess player (two moves ahead), meaning you need to be able to identify your replacement property, designate it within 45 days, and receive it within 180 days.
Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
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