1031 exchanges are a type of real estate transaction which allows property owners to exchange real estate while deferring capital gains and depreciation recapture taxes. In order to comply with the stipulations of 1031 exchanges, property owners and real estate investors are required to reinvest 100-percent of the equity into “like-kind” property of equal or greater value.

Engaging in 1031 exchanges requires the services of a Qualified Intermediary (QI). These trained real estate experts are qualified to handle all aspects of 1031 transactions. From proper documentation to money transfers, QIs understand the intricacies of 1031 exchanges set forth in Section 1031 of the Internal Revenue Code.

When hiring a Qualified Intermediary, careful consideration should be given. QI’s hold all monetary proceeds and prepare legal documents required to link together 1031 exchange real estate properties. One mistake can cause the Internal Revenue Service to impose hefty penalties and taxes.

Two time restraints are imposed with 1031 exchanges. The first requires real estate investors to identify a “Replacement Property” within 45 calendar days from the date of transfer of the “Relinquished Property.” This is referred to as the “Identification Period.”

The second time restraint is known as the “Exchange Period.” The exchange period begins on the date the relinquished property is transferred and expires after 180 calendar days. 1031 exchanges must be completed during the 180-day exchange Period.

One important aspect of 1031 exchanges is the requirement that replacement properties and relinquished properties must be held as real estate investments. However, this requirement is broadly defined and allows real estate investors to sell one type of investment property for a completely different type of real estate.

For example, using 1031 Tax Deferred Exchanges, real estate investors could sell an apartment complex to purchase undeveloped land or sell raw land to purchase a warehouse.

1031 exchanges prohibit investors from accessing equity money during the Exchange Period. The Qualified Intermediary is required to hold funds during the time between the sale of relinquished property and the purchase of replacement real estate.

Another requirement of 1031 exchanges involves how real estate properties are titled. Replacement property must be titled exactly the same as relinquished real estate. For example, if relinquished real estate is titled as Joe Jones Investments, replacement property must be titled the same. It could not be titled as Joe Jones or Joe Jones Real Estate.

1031 Exchanges are not limited to only real estate. Any type of investment property can be exchanged as long as it is traded for like-kind property. To properly engage in 1031 exchanges real estate must be exchanged for real estate and other investment property, such as equipment, must be exchanged for like-kind property.

1031 exchanges cannot be used in the exchange of personal residences or vacations homes. The exception to this rule is if the property is used for rental purposes. 1031 exchanges cannot be used to exchange inventory, stocks, bonds, or a partnership interest.

As long as exchange funds are used to purchase like-kind investment property, capital gains taxes are deferred. This tax deferment is like receiving an interest-free loan on the taxes that would have been owed for a cash sale.

Author Bio: Learn how to harness the power of 1031 exchanges from California real estate investor, Simon Volkov. His website provides an abundance of real estate investing information and provides multiple resources and insider-secrets to help investors expand their knowledge and financial portfolios. Start building your real estate portfolio by visiting www.SimonVolkov.com today.

Category: Real Estate
Keywords: 1031 exchanges, real estate, investment properties, qualified intermediary, capital gains tax