Also called a Starker Exchange Trust, a 1031 exchange is generally used by someone who wants to sell an investment property that they own, yet do not want to pay any taxes. A 1031 will allow the seller of the investment property to defer the taxes as long as they purchase another property which costs the same, or more, than the property they are selling. There are some very strict regulations for using this exchange.
If you own an investment property, then you might be able to take advantage of this trade and quite likely save quite a sum of money, merely by exchanging assets instead of selling them. A “like kind” exchange under the IRS 1031 Exchange is applicable to personal belongings and real estate and might save you both state and federal taxes, anywhere from approximately 15 to 36% per dollar gained, according to your specific state’s tax rate.
To facilitate a 1031 exchange and to satisfy the requirements of the Internal Revenue Service you will need to use a Qualified Intermediary (QI), as this also helps to ensure that all of the rules for the exchange have been met and that it will be approved. They represent the taxpayers who are buying and selling the assets by holding the funds for them.
Once the sale of your property has gone through, you will have 45 days to declare the prospective replacement property that is the 1031 like kind exchange of the property that was sold. The good news is, all real estate is considered “like kind” so you can trade land for an office building, and so on. Once approved, you need to buy your like kind property within 180 days from the date you sold your previous property. So as to put off 100% of the taxes from the sale, you will need to meet two requirements with the new property; first you have to purchase a property that’s of equal or greater value than your other property alsoyou need to use 100% of the net proceeds from the original property to buy the new property.
The last step towards ensuring that the 1031 exchange is approved is to be sure that the new property is titled in the same name as the old property. In other words, if the old property was titled to a corporation or individual, then the new property must be titled in the same corporation or individual’s name.
I hope this helps some. There are a lot more details to keep in mind, but this is a basic overview of 1031 exchange process.
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