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What is a 1031 Exchange?

1031 exchanges are specifically structured transactions that join together the sale of an old property and the purchase of a new property for the purpose of deferring capital gains taxes.
Exchanges are primarily used for buying and selling investment real estate, but they can can also be used for personal property that is used in the business. Examples of qualifying property include bare land, rental property, commercial buildings and homes other than your primary residence.

How Can a 1031 Exchange Work For Me?

A 1031 exchange can defer the capital gains taxes that are due when you sell property that has increased in value or been depreciated for tax purposes. These federal and state capital gain taxes and depreciation recapture can be costly.
Internal Revenue Code Section 1031 offers you some relief. It allows you to defer payment of capital gain tax by investing in a new qualified property.
An exchange can benefit you in several other ways. By deferring taxes, you have increased flexibility, leverage and buying power. Exchanges also allow you to change, diversify or consolidate your investments.

The 6 Rules for 1031 Exchanges...

1.Real Property Use.Both your old and new properties must qualify as investment or business use. If both properties pass the test, you can exchange nearly any type of real estate.
2.45 Day Identification Period.You have 45 days from the closing of your sale to identify and list the properties you may want to buy. There are NO exceptions to the deadline.
3.180 Day Exchange Period.From the sale closing date, you have 180 days to close on the purchase of one or more properties from the 45 day list. Again, there are NO exceptions to this deadline.
4.Qualified Intermediary (QI).The IRS mandates that you us a QI to prepare the legal documents for your exchange. Because the QI must be independent , it cannot be your friend, employee, broker, or even your accountant or attorney. The QI also holds your money, so that you do not have access to it.
5.Proper Title Holding.You must purchase and take title to your new property exactly as you held title to your old property.
6.Reinvestment Requirement.You must reinvest all of the cash proceeds from your sale. To defer all of your capital gain tax, you must buy a property equal or higher in value than the one you sold by the 180th day.
The regulations, court cases, and IRS rulings that apply to your exchange are ever-changing. If you desire to take advantage of a 1031 exchange, Howard Leino has working experience with Qualified Intermediaries.

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