A 1031 exchange is a tax-deferred exchange whereby recognition of capital gains and related taxes can be deferred through the exchange of like-kind business or investment property. Like-kind property is defined broadly in the sense that property can be exchanged even if it is a different species of real property altogether. (agricultural, commercial, rental property, etc.)

Integral to the 1031 process is the use of a qualified intermediary to facilitate the exchange. Replacement property relinquished property, and proceeds, are all transferred between the parties through the use of a qualified intermediary. The taxpayer is never to have actual or constructive control over the proceeds.

Statutory deadlines are essential to the 1031 exchange process as well. For example, there is typically a 45-day deadline to identify replacement property and a 180-day deadline to acquire the identified property. The 180-day deadline includes the 45-day identification period and is not in addition to that time.

Other considerations include:

  • Keeping replacement property for business or investment purposes for 2 years before considering personal use;
  • Renting to family members should also be done at fair market value under circumstances where they are treated as regular tenants;
  • To defer all taxes, the entire net sales will need to be reinvested, not just the gain; and,
  • Any "boot", or cash a taxpayer desires from the exchange, will be taxable, even if the taxpayer intends to use the "boot" for improvement purposes.

Please call us at Dyer Land Title so we can assist you in your 1031 exchange.

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