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IRS 1031 Exchange Rules: A Simple Definition

IRS 1031 Exchange Rules: A Simple Definition

By on Oct 23, 2019 in IRS | 0 comments

1031 Exchange Rules

When you have assets, you always want to make sensible business decisions. That means knowing when you should sell or buy certain properties in the United States, and when a gain or loss will happen. You want to ensure that property being sold provides more value. 

United States Rules For Real Estate

Normally on personal property, you have to pay a tax on selling the estate towards the government. This tax is called the capital gains levy because it takes a percentage of the profit of a property sale. Those profits are capital gains for the seller. 

There are some exceptions to paying a tax on capital gains. Per the Taxpayer Relief Act of 1997, a single homeowner doesn’t have to pay taxes on the first $250,000 from the sale while married couples don’t have to pay up to $500,000. You qualify for this exemption by living on the property from two to five years and designating it as your primary residence. 

What 1031 Means To Real Estate Investors

A 1031 exchange means that you purchase a property after selling your original investment, and both are equivalent in value at a minimum. In some cases, the new property can even be worth a higher value. 1031 is a tax-deferred exchange, which means that you don’t have to pay capital gains on the sale

To engage in a 1031 exchange, you need to choose a qualified intermediary to hold the funds from the initial sale, which will then be reinvested into purchasing another property. A qualified intermediary can either be a person or a business with no conflicts of interest or relationships with either the buyers or the sellers. They have to serve as a neutral party.  

Investors have multiple incentives to invest in this exchange. The tax deferral is one such incentive, to avoid paying on capital gains. You can also consolidate all of your property assets and streamline management, so as not to juggle hats, and recapture deprecation on estates that lose value every year. 

1031 Rules For Exchanged Property

How do you qualify for a 1031 exchange? First, create a purchase and selling schedule. You have a time window to locate this replacement within 45 days, and you must purchase it before the window exceeds 200 days. 

1031 Exchange

Second, choose your properties efficiently. The three-day rule ensures you can choose at least three properties regardless of the market value that you wish to purchase while selling yours. The 200% rule, in contrast, lets you choose multiple properties whose total value cannot exceed 200% of the property you’re selling. With the  95% rule, you have no limits on how many properties to choose as long as each is worth 95% of the cumulative market value or more. 

We advise that you do not conduct a 1031 exchange alone. For one, the procedure can become extremely complicated. Seek a professional to assist with the internal revenue code. 

Learn More About The IRS From Success Tax

Success Tax wants to help you find the best deals for your business and personal finances. You won’t have to worry about losing out on a potential investment, or about navigating complicated tax laws alone.

Contact us today to get started on your tax plans. We’ll help you file your tax returns efficiently, invest wisely, and navigate property rules with ease. 

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