Using the Section 1031 Tax Deferred Exchange vehicle for deferring capital gains tax at both the Federal and State levels is one of the best tools available for preserving and building your personal wealth. The following Section 1031 Tax Deferred Exchanges are currently available for the tax payer’s use:
1) Simultaneous Title to both the Relinquished and Replacement like-kind properties
are exchanged at the same time.
2) DelayedThe Relinquished property transaction is closed first with the funds from the proceeds transferred to Exchange Facilitators, Inc. to hold in trust until the Replacement property is ready to close and funded by Exchange Facilitators, Inc.
3) Construction This exchange contemplates Exchange Facilitators, Inc. holding the
proceeds from the close of the Relinquished transaction and contracting with the tax
payer’s contractor to construct and fund a building project on behalf of the taxpayer.
4) Reverse The Replacement property is purchased first by Exchange Facilitators, Inc. with funds provided by a third party and an exchange is completed with the later closing of the Relinquished property transaction.
5) Reverse Construction Exchange Facilitators, Inc. enter into a reverse exchange
coupled with construction on behalf of the taxpayer.
There are two time limits imposed on delayed real estate exchanges. The Replacement Property must be “identified” within 45days of the date of the legal transfer of the Relinquished Property. The title to the Replacement Property must be legally transferred within 180 days of the date of the legal transfer of the Relinquished Property. Three conditions must be met to defer taxes on your gain under Section1031:
1. The properties exchanged must qualify, and be of “like-kind”.
2. There must be an actual exchange, not a transfer of property for money only.
3. The time requirements must be strictly followed.
To meet the requirements of Section1031, both Relinquished Property and Replacement
Property must qualify. In other words, both the property you are selling and the property you are buying must be qualified property of like-kind. If not, your exchange will fail and be classified as a taxable sale. For income tax purposes, real estate is divided into four classifications. Classification is made as of the date the transaction is made. The classifications are:
1. Land held for investment (Section1221)
2. Land held for business use (Section1231)
3. Land held primarily for sale (dealer property)
4. Land held for personal use
The first two classifications qualify under Section1031. The second two, dealer property and land held for personal use, do not qualify under Section1031.