1031 tax deferred exchange is executed successfully only if the investor follows a set of rules by IRS. Otherwise, the investor will fail to defer capital gains tax. Through this article, we discuss five rules you must be aware of if you are indulging in the exchange.
1) 45-day for identification
After selling the relinquished property, you get a window of 45 days for identifying the replacement property. You can identify up to three properties during this time-frame. There is also a 200 percent rule linked to identification of properties. You are able to identify four or more properties under this rule if the combined value of these properties is not more than 200 percent.
2) 180-days for buying
You need to buy the properties within 180 days (or six months) after the closing of the relinquished property. If the investor extends his tax return, the window of 180 days begins from the extension date.
3) Equal or greater value
If you don’t wish to pay taxes after selling your property, you must purchase the property with value equal to or greater than the property being sold. If you fail to do so, you cannot defer 100 percent of the tax. For example, if your property is worth 3,000,000 dollars, along with the mortgage of 500,000, you have to buy new property with value of at least three million dollars. Also, the mortgage should be of 500,000 dollars.
You must purchase and sell like-kind property to qualify for the process. This means properties must of the same character or nature. It does not matter if they differ in quality or grade. As a part of this rule, you are not allowed exchange office building for farming equipment. Exchanging a showroom for a vacation rental is allowed. Also, commercial office building can be exchanged with single family rental property.
5) Only investment/business property is allowed
The exchange is not applicable for personal property. This means that you are not allowed to swap a primary residence for another. For example, if you have shifted from Idaho to Texas, you can’t exchange Idaho’s primary residence against primary residence in Texas.
Apart from following these rules, it is necessary to consult an advisor for effective execution of this process. If you are looking for replacement property in Massachusetts, contact FAI Exchange. The company helps you find DST properties that can be qualified for 1031 exchange.