What Are The Rules For A 1031 Exchange

Are you new to real estate investing? Getting into this field includes a bit of a learning curve, but once you have some experience you can maximize your gains. One way to do this is to take advantage of the 1031 exchange law. A 1031 exchange is a tax law that can benefit real estate investors by allowing them to defer taxes when buying and selling property. As with any tax law there are rules regarding what qualifies for a 1031 exchange. 

The Properties Must Be “Like Kind”

The first rule in a 1031 exchange is that the property you are selling must be “like kind” to the property you are buying. “Like kind” is a relatively loose rule that applies to generally all real estate. It refers to the type of property regardless of quality or condition. Selling a single family home and buying an apartment building qualifies as a 1031 exchange. Selling one investment property for multiple properties also qualifies. If you are planning to buy and sell property, refer to your tax advisor to determine whether or not the transaction qualifies for a 1031 exchange. 

A Qualified Intermediary is Required

In order to defer taxes, the profits from the sale of a property cannot be in your hands. Instead they must be held in an escrow account by a qualified intermediary. Examples of qualified intermediaries include attorneys, accountants, title insurance companies, real estate brokers, and others. Examples that don’t qualify include family members, employees, or anyone you’ve had a financial relationship with in the past 2 years. In other words, the qualified intermediary needs to be a neutral party. 

Time Requirements

You have 45 days following the sale of one property to find a “like kind” property in order for the exchange to qualify for a 1031. The seller or the qualified intermediary must be informed in writing for documentation. You have 180 days from the closing of the sold property to close on the new property, or from the day your tax return is due, whichever is earlier. 

You Must Inform the IRS

There is a form that must be submitted to the IRS to inform them of the exchange in order to qualify for tax deferment. You can file form 8824 with your tax return that will outline the details of the transaction so that the IRS is fully informed, protecting you from tax penalties. 

You May Be Taxed Anyway 

Under certain circumstances you may still have to pay taxes on the exchange to some extent. Situations include: 

  • If the property sold is worth more than the property being purchased, the profit you make that doesn’t go into the purchase of the new property will be taxed.
  • If the initial sale of the property falls through, you may be taxed when it does sell. 
  • Any leftover funds from the sale can be taxed. 

Is a 1031 Exchange Right for Me?

If you’re considering selling a property and buying another property, you may benefit from a 1031 exchange. Consult with your tax advisor before entering into any transaction that may affect your taxes to ensure that it is the right decision for you from a financial standpoint. Tax laws can be complicated and difficult to understand without experience. Reduce your financial risk by talking to an expert. 

American Guardian Title Can Be Your Qualified Intermediary 

As a title company, American Guardian Title can act as your qualified intermediary in a 1031 exchange. We can establish an escrow account to hold the funds during the transaction, allowing you to defer paying taxes on the profit from the sale of property while you find a new property to invest in. We provide this and many other services related to real estate transactions in Florida, Georgia, Tennessee, Virginia, and Maryland. 

Call 833-331-8476, 813-331-3010, or contact us today to learn more. 

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