What is a 1031 - Like Kind Exchange?
A 1031 - Like-Kind Exchange is a tax deferred exchange transaction under section 1031 of the Internal Revenue Code. This section allows for the sale of certain types of real and personal property with the deferral of payment of capital gains tax at that point. The key is the language in the code which states: "No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment purposes if such property is exchanged solely for property of a like-kind which is to be held for either productive use in trade or business or for investment purposes." This means that you must chose replacement property which is "like-kind" and you (the investor) cannot receive any "boot" (cash or other benefits) at the closing.
What is an "Exchanger?
An "Exchanger" is the investor in the exchange transaction. The Exchanger will be both selling the "Relinquished Property" and acquiring the "Replacement Property."
What is a "Qualified Intermediary?
A "Qualified Intermediary" is a party to a "deferred" or a "reverse" exchange transaction. The selection of a Qualified Intermediary is an essential part of the transaction.. It is extremely important that the Qualified Intermediary be familiar with the requirements of the 1031 process and the pitfalls that may be faced. The security of the proceeds are of the utmost concern. A good Qualified Intermediary will be experienced in 1031 transactions and have the financial resources and backing to be there when you need them.
How can a 1031 work to my benefit?
Under section 1031 you may be able to sell property and replace it with property of "like kind" without having to pay tax on the gain. This can be extremely beneficial by allowing the leveraging of all of your gain in a real estate transaction. This means that all of your gain may be used in the purchase of the replacement property.
What is a "Delayed Exchange?
A "Delayed Exchange" means that the relinquished property will be disposed of with some delay between that event and the acquisition of the replacement property. This period of time between the original sale and the acquisition of the replacement property is subject to strict rules imposed by the Internal Revenue Service. If the rules are not followed the "exchange will fail and the tax will not be deferred.
What are the time limits in a delayed exchange transaction?
Upon the sale of the relinquished property the exchanger will, generally have forty five (45) days to identify potential replacement property and one hundred eighty (180) days to complete the exchange transaction. Both of these time limits are from the date of the sale of the relinquished property. These are not all of the time rules involved in the delayed exchange transaction. We will be happy to discuss these requirements with you.
Can the exchanger hold the proceeds during the delayed period?
No, the exchanger cannot hold the funds during the delayed period. The exchanger also cannot be in constructive receipt of those funds. The proceeds of the sale of the relinquished property will be parked with a "Qualified Intermediary" until the acquisition of the replacement property.