In general, Section 1031 of the Internal Revenue code allows an owner to exchange one property for another and defer payment of the state and federal capital gains taxes, as long as both properties are of “like-kind.” That is, the properties must be either 1) held for productive use in a trade or business, or 2) held for investment.

For example, single-family rental houses in Missouri can be exchanged for an apartment in Texas, or land in Florida can be exchanged for a commercial building in Colorado. This flexibility helps property owners realize their investment objective. By exchanging instead of selling for cash, owners can diversify or consolidate holdings, reduce management’s commitments, or improve cash flow.

Over the long term, acquiring real estate through exchanges is an excellent method of building wealth. Section 1031 allows continued deferral of taxes on subsequent exchanges, enable the owner to increase equity without the burden of capital gains tax.

In summary, the 1031 is the sale of one property followed by the purchase of another. It is critical that a qualified intermediary holds funds, that both properties are “like-kind,” and that the exchange time period requirements are met.

Contrary to what most owners envision, a 1031 exchange is rarely a simultaneous two-party swap. In a typical exchange, a property is sold by the exchanger to any buyer during Phase I. Sunrise Title must be retained prior to this closing. The exchange funds are held safely in Sunrise Title’s qualified exchange account (The IRS stipulates that the exchanger cannot be in actual or constructive receipt of the funds at any time during the exchange). When Phase I closes, the exchange period begins. The exchanger has 45 days to identify and 180 days to close on a replacement property. Phase II is the acquisition of the “like-kind” replacement property, which can be executed any time within the 180 days of closing the sale property.



How to Proceed:

1)      Always discuss your intended exchange with your tax advisor.

2)      Call Sunrise Title as early in the sale as possible and definitely before closing any escrows or contracts.

3)      Begin searching for a replacement property as soon as you have accepted an offer on your sale property.

4)      Relax, and let Sunrise Title guide you through the exchange!

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