What Is a 1031 Exchange
& How Does It Work
What Is A 1031 Exchange?
A 1031 Exchange is a transaction in which a taxpayer is allowed to sell one property and buy another without a tax consequence. This can be done through a simultaneous or delayed 1031 Exchange. The transaction is authorized by Section 1031 of the IRS Code. It is the best strategy for the deferral of capital gains tax that would ordinarily arise from the sale of real estate.
A successful exchange results in the taxpayer being able to utilize 100% of the proceeds from the sale of property to purchase a new property, thereby deferring capital gains taxes.
Real Esate owners can accomplish virtually any objective with 1031 Exchanges, including greater leverage, diversification, improved cash flow, geographic relocation, and/or property consolidation.
How Does A 1031 Exchange Work?
A 1031 Exchange is usually a three-way delayed exchange, referred to as a "Starker Exchange", in which an intermediary is used to facilitate the transaction. There are four basic steps:
- Seller arranges for sale of property and includes exchange language in contact.
- At closing, sales proceeds go to a Qualified Intermediary for a 1031 Exchange
- Seller identifies potential exchange properties within 45 days of the closing.
- Seller completes 1031 Exchange within 180 days of closing.