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A 1031 Exchange, also referred to as a Starker Exchange or a Like-Kind Exchange, is a way, pursuant to 26 U.S. Code Section 1031, for an investor to sell an investment property and purchase another investment property while deferring the capital gains taxes. The IRS is very strict when it comes to a 1031 Exchange. There are a few important requirements that must be followed precisely.
A person cannot sell an investment property to buy a principal residence or sell a principal residence to buy an investment property and benefit from a 1031 Exchange. The investment property does not need to be exchanged for the exact same kind of investment property. The only requirement is that it is an investment property.
To qualify for a 1031 Exchange, the investment property must be in the United States. You cannot qualify for a 1031 Exchange if you are a foreign investment. These periods run concurrently and cannot be extended.
Identification Period
The seller has 45 days after selling their investment property to identify and submit the address of the replacement property to a Qualified Intermediary. They do not need to purchase the property during this time period. They must simply identify the property that they intend to purchase.
Exchange Period
The seller has 180 days from selling their investment property to complete the purchase of the replacement property. To meet IRS requirements, the settlement must occur within 180 calendar days of selling the first property, or the investor may be subject to capital gains taxes.
Finally, the investor must use a Qualified Intermediary, an independent third party that holds the money. During a 1031 Exchange, the investor can’t touch the money. If the title company were to complete the settlement and send the money to the investor, the funds would be subject to capital gains taxes. The money can’t be sent to anyone but a Qualified Intermediary who will hold the funds until the settlement occurs for the property being bought. Lastly, all the funds must be used for the purchase; any leftover money from the initial sale will be subject to capital gains taxes.
Any questions regarding 1031 exchanges can be submitted here.