Learn About The Key Considerations For Conducting A Like-Kind Exchange From An Experienced 1031 Exchange Agent.
While 1031 exchanges allow taxpayers to achieve significant tax deferred savings, navigating the process successfully requires an in-depth understanding of the rules that apply. As a result, when seeking to exchange one piece of like-kind real property for another, it is important to work with an experienced 1031 exchange agent (sometimes referred to as a 1031 qualified accommodator, 1031 facilitator or 1031 exchange specialist). An experienced agent will be able to help make sure your transaction (or transactions) qualify for tax deferral by guiding you through careful consideration of all relevant factors.
5 Key Factors For Securing Tax Deferral Through A 1031 Exchange
What are the factors involved in making sure an exchange qualifies for tax deferral under Section 1031? Here are five key considerations for 1031 exchanges:
1. Timing And Deadlines
Timing is a critical factor in 1031 exchanges. Section 1031 establishes strict deadlines, and taxpayers must meet these deadlines in order to secure tax deferral. For example, in most cases the sale of the exchanged property and acquisition of the replacement property must take place within 180 days. Furthermore, in a straightforward exchange, replacement properties must be identified, in writing, within 45 days of the sale of the taxpayer’s real property.
2. Replacement Property
A 1031 exchange requires that one piece of property be sold for the purpose of buying another. This “replacement property” must qualify for nonrecognition under Section 1031. Not all types of real property qualify, and this is a factor you will want to discuss with your 1031 exchange agent as well as your tax professional.
3. “Like Kind” Property
One of the main requirements for a replacement property is that it must be of “like kind” to the real property being sold. Not all assets that are similar in nature qualify as “like kind” under Section 1031. For example, Section 1031 specifically provides that, “[r]eal property located in the United States and real property located outside the United States are not property of a like kind.”
4. Investment Intent
When conducting a 1031 exchange, the exchanged property must be held, “…for investment.” However, property held “primarily for sale” does not qualify. Your 1031 exchange agent can discuss this with you, and you should discuss this with your tax professional to determine if your replacement property was held for “investment”.
5. Debt And Equity Considerations
Debt and equity considerations can play an important role in 1031 exchanges as well. For example, if the sale of an exchanged property results in elimination of debt that is not replaced with debt on the replacement property, this “boot” may be taxable even if the overall transaction qualifies as a like-kind exchange.
Discuss Your Transaction With An Experienced 1031 Exchange Agent
If you need to know more about the requirements for conducting a like-kind exchange, we invite you to get in touch. Please call or contact us online to speak with a 1031 exchange agent at 1031 National Services.