1031 Exchange: Like-Kind Rules & Basics to Know – NerdWallet

If you ’ rhenium think of selling a piece of property that could result in a big profit ( and a big tax bill ), a 1031 exchange could be a useful strategy.

What is a 1031 exchange?

A 1031 exchange, named after section 1031 of the U.S. Internal Revenue Code, is a direction to postpone capital gains tax on the sale of a business or investment property by using the proceeds to buy a similar place. It is besides sometimes referred to as a “ like-kind ” exchange.

What qualifies as a 1031 exchange?

A key rule about 1031 exchanges is that they ’ re generally only for business or investment properties. property for personal use — like your base, or a vacation family — typically doesn ’ triiodothyronine count. Securities and fiscal instruments, such as stocks, bonds, debt instruments, partnership interests, inventory and certificates of trust aren ’ metric ton normally eligible for 1031 exchanges. » MORE : Read how capital gains tax works on home plate sales.

How to do a 1031 exchange

A 1031 exchange can be building complex, so you ‘ll likely want to consult with a dependent tax pro. You can read the rules and details in IRS Publication 544, but here are some basics about how a 1031 exchange works and the steps involved.

Step 1: Identify the property you want to sell

A 1031 commute is generally alone for clientele or investing properties. place for personal habit — like your primary coil mansion or a vacation home — typically doesn ’ thymine count.

Step 2: Identify the property you want to buy

The property you ’ ra sell and the property you ’ rhenium buy have to be “ like-kind, ” which means they ’ ra of the same nature, character or classify, but not necessarily the lapp choice or grad ( more on that under ). note that property inside the U.S. international relations and security network ’ t considered like-kind to place outside the U.S.

Step 3: Choose a qualified intermediary

If you don ’ t receive any proceeds from the sale, there ’ s no income to tax — that ’ s broadly the idea behind a 1031 change. One way to make sure you do n’t receive cash prematurely is to work with a dependent mediator, sometimes called an exchange facilitator. Basically, they hold the funds in escrow for you until the commute is accomplished ( assuming the sale and the purchase don ’ t take place simultaneously ). Choose cautiously. If they go bankrupt or flake on you, you could lose money. You could besides miss key deadlines and end up paying taxes now preferably than late.

Step 4: Decide how much of the sale proceeds will go toward the new property

You don ’ t have to reinvest all of the sale proceeds in a like-kind property. by and large, you can defer capital gains tax entirely on the part you reinvest. thus if you keep some of the proceeds, you might end up paying some capital gains tax now.

Step 5: Keep an eye on the calendar

For the most contribution, you have to meet two deadlines or the profit on the sale of your property may be taxable. first, you have 45 days from the date you sell your property to identify potential successor properties. You have to do that in writing and share it with the seller or your dependent mediator. second, you have to buy the new property no late than 180 days after you sell your erstwhile property or after your tax reelect is due ( whichever is earlier ).

Step 6: Be careful about where the money is

Remember, the hale mind behind a 1031 exchange is that if you didn ’ t receive any proceeds from the sale, there ’ s no income to tax. indeed, taking control of the cash or early proceeds before the exchange is done may disqualify the deal and make your acquire immediately taxable.

Step 7: Tell the IRS about your transaction

You ’ ll likely need to file IRS Form 8824 with your tax recurrence. That shape is where you describe the properties, provide a timeline, excuse who was involved and detail the money involved.

Important things to know about 1031 exchanges

hera are some of the celebrated rules, qualifications and requirements for like-kind exchanges .

  • You inactive have to pay tax, merely former. A 1031 exchange doesn ’ thyroxine make das kapital gains tax go off ; it equitable postpones it. A capital gains tax bill will come due at some sharpen, so cook for that .
  • The properties don ’ t have to be angstrom like as you may think. You don ’ metric ton necessarily have to swap a lease property for an identical lease property or a park draw for a parking lot. “ Like-kind ” broadly means you ’ rhenium swapping one investment property for another investing property ( again, be indisputable to see a certified tax pro before taking action ). It might be possible to exchange vacant domain for a commercial build up, for exercise .
  • Relationships matter. Your modify mediator or exchange facilitator can ’ thyroxine be a relative, your lawyer, banker, employee, accountant or real estate agent. People who have served you in any of those capacities in the past two years are besides off-limits. And you can ’ deoxythymidine monophosphate be your own qualify mediator .

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Types of 1031 exchanges

hera are three kinds of 1031 exchanges to know.

Simultaneous exchange

In a coincident exchange, the buyer and the seller exchange properties at the same time.

Deferred exchange (or delayed exchange)

In a postpone exchange, the buyer and the seller exchange properties at unlike times. however, the sale of one property and the purchase of the other property have to be “ mutually dependent parts of an desegregate transaction. ” The rules here can get particularly complex, thus see a tax pro.

Reverse exchange

In a reverse exchange, you buy the new property before you sell the old place. sometimes this involves an “ exchange adjustment titleholder ” who holds the newly property for no more than 180 days while the sale of the old property takes place. Again, the rules are complex, so see a tax pro.

Watch out for 1031 exchange scams

The IRS permits 1031 exchanges. But person promoting them might have ulterior motives if they tell you to exchange vacation homes ( property for personal use typically doesn ’ deoxythymidine monophosphate qualify ) or that the manage is tax-exempt ( actually, it ’ sulfur tax-deferred ) .

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