|
What is a 1031 Exchange?
A 1031 Exchange, also known as a "Starker" or "Tax-Free" Exchange, is a way to avoid paying taxes by reinvesting gains from the sale of investment property.
What this means is that you can sell your property to a buyer, then through a "qualified intermediary" use that money to purchase another property of "like kind". The intermediary holds the funds from the sale until you use them to buy another property. There are several companies that will act as an intermediary for a fee, usually around $500 to $1000.
What kind of property qualifies?
Any real property (land, homes, commercial property) held as an investment qualifies for the exchange. (1031 Exchanges are not for primary homes, but in most cases, at least the first $250,000 of gain on your home will be tax-free.) You must re-invest the entire sales price, not just the gain, but you may re-invest in multiple properties so long as the total price meets or exceeds the sales price of the property you are selling.
How long do I have to re-invest?
You must identify the property that you intend to purchase within 45 days of closing on your sale. What constitutes "identifying" can change depending on whom you ask, but an MLS printout on the properties you are considering should suffice. More importantly, you have six months from the date of the closing on your investment property to close on the replacement property, or the due date of the next year's tax return, whichever comes first.
Where can I find more information?
This IRS has a web site with information on the 1031 Exchange, and there are several internet-based intermediary companies which have informational websites as well. A note of caution here: I have not had good experiences with internet intermediary companies; I would highly recommend using whichever company your closing attorney typically uses.
What's with all the names?
Although "1031" refers to the section of the IRS code that addresses "like kind" exchanges, it was really created by a court case between Charles Starker and the IRS, when the IRS sued Starker and lost. Starker had put a twist on the normal 1031 like-kind exchange in which investment property can be traded for another investment property with no tax ramifications. Starker had the potential buyer for his property, in this case a lumber company, buy another property which he desired. Then the two simply traded properties. The IRS tried to stop him, but lost every time it was brought to court.
|
