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What is a 1031 Exchange?

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Are you interested in selling or buying real estate, but aren’t sure that your company–or family is prepared? Undergoing a 1031 exchange is probably a realistic option for you, but you may be wondering–‘What is a 1031 exchange?’ These tips will help you to figure out how you can complete the transaction, and will give you tips on how to make sure that you’re completing all the steps in the process within the right time frames.

But first, let’s answer the question ‘What is a 1031 exchange?’ This is a process in which a seller opts to defer paying income taxes that are usually due from the sale of a business or investment property. Instead of keeping the proceeds from the property sale after the close of escrow, the seller then purchases another property that is similar in nature to the property that was just sold. It is also important to know that these exchanges do not include the exchange of stocks and bonds, or notes and inventories.

After you learn what is a 1031 exchange, you’ll need to be aware of the risk factors that are involved with the transaction. Investors that take advantage of the transaction have to be sure to follow the 1031 regulations, and this includes following strict timelines and fund management tactics. The most commonly used 1031 transaction is the delayed exchange. This means that the relinquished property is sold before the purchase of a replacement property. During this type of exchange, the investor or exchanger has 180 days after the relinquished property closes escrow to buy the replacement property. Even though the exchanger has 180 days to close the sale of the replacement property, the replacement property has to be found and identified within 45 days before the first close of escrow.

The other types of 1031 exchange include the reverse exchange, which means that the replacement property is purchased before the sale of the relinquished property. Then there is the simultaneous exchange, in which the relinquished and replacement properties close escrow at the same time. There is also an improvement exchange, and this takes place when the exchange proceeds are used to improve the existing or replacement properties.

Some of the benefits to the 1031 exchange include the fact that your taxes can be deferred. When you participate in a 1031 transaction, the exchanger will be keeping more of the money working for them by replacing investments without having to pay capital gains on the transaction.

If you want to know more about ‘what is a 1031 exchange?’, or have questions about how to make the right investments, you can visit www.irs.gov for more details.

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