In a 1031 exchange capital gains taxes are deferred when a taxpayer sells a qualified real estate investment and uses the funds to buy a like-kind property. The property being sold is the relinquished property and the new investment is known as the replacement property.
In many cases a 1031-exchange between a relinquished property and a like-kind replacement property happens simultaneously. This means that when a taxpayer sells their investment property they immediately use the proceeds to purchase a like-kind replacement.
However, there are some cases that a replacement property isn’t identified at the time a property is relinquished. In this case, there are timelines that should be followed when attempting to qualify as a 1031 exchange.
Once the relinquished property is sold, the taxpayer has 45 days to identify a replacement investment. The replacement property or properties should be acquired within 180 days, inclusive of the 45 day identification period, sometimes less. Up to three properties can be identified, as long as one is purchased within the 180 exchange period.
If more than three properties are identified as possible exchanges, the value cannot exceed 200% of the relinquished property's value.
If the relinquished property is sold and the investor doesn’t wish to purchase a like-kind property, another option might be a Delaware Statutory Trust (DST). A taxpayer can take the funds from the sale of their property and buy shares in a DST if they are seeking passive income without having day-to-day management of a property. It is also a way to own a share of higher value real estate than they could accomplish on their own.
The intricacies of a 1031 exchange and the rules set by the IRS are complex, and it is always best to consult with a financial advisor if you are unfamiliar with the requirements.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation. Costs associated with a 1031 transaction may impact investor's returns and may outweigh the tax benefits. The actual amount and timing of distributions paid by programs is not guaranteed and may vary. There is no guarantee that investors will receive distributions or a return of their capital. The income stream and depreciation schedule for any investment property may affect the property owner's income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities. No public market currently exists and one may never exist. DST programs are speculative and suitable only for Accredited Investors who do not anticipate a need for liquidity or can afford to lose their entire investment.
