For those of you who don’t understand what a 1031 exchange is, but have already heard about it and would like to know what it is, now is your chance. Also, I will do my best to explain it in very simple terms so that regardless of your experience, you can understand it and how you can benefit from it.

First, to understand what a 1031 exchange is, you need to understand the purpose behind it. The whole concept behind a 1031 exchange is to defer some taxes (capital gains tax) from the sale of that property, when you plan to invest the proceeds of that sale directly in another property. People do this so as not to lose any equity in the transition from one property to another.

So now that you understand the purpose, you need to understand a little about how it works. First, the law requires you to have what is called a QI. This is a third party that is independent and serves as a qualified intermediary (hence QI). They are there to withhold the proceeds from the sale of the first property you sell until you invest it in another property.

Here are some rules about what you can and cannot qualify for a 1031 exchange. First, remember that we are talking about property. This cannot be done with anything other than investment properties. However, that can be broadly defined as single-family rental units, multi-family rental units, office buildings, storage facilities, vacant lots, retail shopping centers, and industrial facilities.

Second, moving from one property to another has to be similar. This does not refer to the condition or value of the properties, but rather that they are similar in character or nature. They (referring to all the properties involved) must also be kept for productive use in trade or business or for investment purposes.

There are many other specific rules the IRS has for this type of exchange and they will likely require that anyone doing this use a qualified professional trained in this. However, there are some general guidelines that you should be able to understand that can help guide you in your decisions about your investment plans if you are researching this.

1- The value of the new property must be equal to or greater than the one you are selling.

2- The equity of the new property must also be of equal or greater value than the one you are selling.

3- The debt of the new property must be equal to or greater than the debt of the property you are selling.

4- ALL net proceeds from the property you are selling must be used to acquire the new property.

There are also some strict scheduling guidelines related to 1031 exchanges. First, the investor must identify the new property within 45 calendar days after the old property closes. (There are some guidelines on how it is identified, but that is a later discussion) Second, the investor must close the new property within 180 calendar days from the closing date of the old property. I hope this has helped you understand, in plain language, what a 1031 exchange is. There is much more information available on this and you should consult a professional if / when you are serious about it.

Leave a Reply

Your email address will not be published. Required fields are marked *