1031 Basics
Many people have heard of a “1031 exchange,” but are not quite sure of what an exchange actually entails. This information will give you a little insight on what we are talking about.

       Following the rules of Section 1031 of the Internal Revenue Code, an investment property can be sold and another purchased without incurring a capital gains tax. You are, in essence, exchanging one investment property for another investment property of equal or greater value to defer capital gains tax to a later date.

The basics of a 1031 exchange are:

    * Property must be exchanged for like kind. Real estate held for investment is like kind to any other kind of real estate that is also held for investment. You can exchange out of or into: single family, multifamily, commercial office, retail shopping, industrial, vacant land, and tenant-in-common investments.

    * You must reinvest all the net cash proceeds from the sale of the relinquished property and must replace the same amount of debt that was paid off on the sale of the relinquished property.  The investor can put more cash into the purchase of like kind property but not pull any cash out.

    * There are very specific 1031 exchange deadlines. The investor has 45 days from the closing of the relinquished property to identify potential like kind properties and an additional 135 days - for a total of 180 calendar days to complete the exchange. (Start looking with your real estate professional at least 30 days before closing of the relinquished property.)

    * Advise your real estate professional, accountant and attorney so they can help you meet with deadlines and all requirements.

    * A Qualified Intermediary is needed to complete necessary legal documents to ensure compliance with laws, regulations and rulings.

    * Investor can identify up to three (3) like kind properties.

    * Special language is required in the contract of sale.

    * It is very advisable to set up in a timely manner the bank account to transfer funds to the Qualified Intermediary.

This is a quick reference guide, provided to you by Dolores Mauriello, broker sales associate with Century 21 Crest, Inc in Pompton Plains. This guide is not a substitute for professional advice provided to you by your attorney and accountant.
 
This is a beneficial tool for an investor to easily reposition, diversify or consolidate their investment real estate portfolios. Dolores can be reached at (973) 686-1500 ext 337.