So you’ve done your research and made your decision: you want to take advantage of a 1031 exchange to defer taxes related to your real estate investment. So how exactly do you qualify for this tax strategy?
First, any investment property owner with a built-up gain (meaning the market value exceeds the property’s adjusted basis) is eligible to do a 1031 exchange. Most people think that qualifying for one is time consuming and complicated, but it’s more simple than you think.
Here’s the qualifying checklist:
You own an investment property
You are willing to sell/exchange your property for a like-kind property
Let’s talk about #1. According to Internal Revenue Code Section 1031(a)(1) an “investment property” is: “propertyheld for productive use in a trade or business or for investment.” This could be as small as a house, condo or duplex, or as large as an office building, apartment complex, shopping center, or industrial building. Even raw land and mineral royalty interests qualify; it’s all considered investment property.
Now, for #2: to qualify for a 1031 exchange you must be willing to exchange your property for another like-kind property. The term “like-kind” as it relates to real estate doesn’t mean the same property type or size property. It means the property (or properties) needs to be in the real-estate-investing realm. You can’t sell your office building under a 1031 exchange and use the proceeds to buy a plane. But you can purchase an apartment complex or even raw land.
And finally, #3: you must be willing to follow established IRS rules regarding tax-deferred exchanges. The IRS doesn’t have a long rulebook with endless hoops to jump through to complete an exchange. The most important rules are the strict 45/180-day guidelines, giving you 45 days to identify a property (or more than one) of equal or greater value, and 180 days from the day you sell your existing property to acquire the replacement property you’ve identified.
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Hypothetical example(s) are for illustrative purposes only and are not intended to represent the past or future performance of any specific investment.
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