Determining if your Property Qualifies for a 1031 Exchange

When considering a 1030 exchange on your real estate investment, there are a few crucial rules to apply. First off, a 1030 exchange is a exchange of “like kind’ properties, deferring the capital gains taxes until the sell of your new property. Basically if you sell your home and instantly reinvest the profits into a new venture, you may qualify for a tax deferment.

There are some very important rules to follow with this type of venture. First and most importantly is the time line in which you have after your property sells until you reinvest in your new property. Even one hour past this point will make the deal null and void, therefore, it is very important to have all your deals and prospects lined out before beginning this venture. Sending time stamped and delivery confirmed documents is of the utmost importance.

You must also use the services of a mediator to actually handle any cash throughout the transaction, should you at any point lay hands on the cash, it then becomes yours and you become responsible for the taxes.

This sort of investment is more valuable for the buyer who will own the property for several years before making another transfer, thus deferring any capitol gain taxes until then. For the investor who is planning to buy and resale in a few years, this may not be the route to go.

Two means of completing this type of transaction are a simultaneous exchange or a delayed exchange. A simultaneous exchange is just as the name implies, you simultaneously exchange your real estate for another, another way is a delayed exchange. In a delayed exchange, your funds will go into an inaccessible escrow account , after which you will have NO MORE then 180 days before acquiring new property to reinvest your funds in. Again the two most important rules apply here, you may never at any time have possession for your funds and you will not be given any more time then the stated 180 days.

A reverse exchange is when you acquire your new property before you sell your existing parcel. In this instance, the funds from your sell will go directly to your new purchase, eliminating 180 day grace period. You may also wish to do a build to suit, or construction exchange. The 180 days does apply here, therefore it is essential to have as much completed by the deadline as possible. Any unfinished construction after the 180 days will not be covered by the exchange clause.

Because there are so many tax laws and they are ever changing, it is very important for you to consult a real estate attorney or an accountant to check your locals law as well as the federal requirements for deferment. Complete understanding of the contact you are entering into is imperative.

Some commonly asked questions are as follows
What are the benefits ?

What are the restrictions ?

What are the costs ?

How will this effect the property should I pass it along in my will ?

May I exchange for foreign property ?

The benefits are that you deferrer your capitol gains taxes, which in states is 20-25% of the profits, meaning the exchange costs you little or nothing in taxes.

The restrictions are that the exchange must be between “like kind” properties. Like kind properties are properties for properties. It does not mean you must exchange a 3 bedroom 2 bath home for a two bedroom 2 bath home, but rather the exchange must between two properties similar is that they are with a range to on another in value.

The cost of filing a 1030 property exchange varies from state to state and ranges between $500.00 to $3000.00.

If the property transfers upon your death via your estate, the estate receives a stepped up valuation to the current market value as of the date your heirs acquired it via inheritance.

You may not exchange US property for foreign property, as these are not considered like kind properties, however you can exchange foreign properties for foreign properties.

When considering any real estate venture, it is very important to consult with a professional in the field to determine what options are best for you and your situation. Since not every real estate investor is after the same goals, finding the option that best fits your situation is very important and can ultimately save you a lot of money in the end.