How does a 1031 Exchange (sometimes called 'like-kind' exchange work)?
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Provision 1031 of the U.S. Income Tax Code allows owners of investment property, be it commercial, industrial, residential real estate, or vacant land, to sell that property and defer capital gains taxes by exchanging the proceeds, through an intermediary, for an investment in another qualifying property or group of qualifying properties.

Recent changes to the tax code have eased restrictions regarding "like-kind" property and now allow properties of different kinds to also be exchanged under Provision 1031.

(This is an important point.)To affect an exchange, the seller places all sale proceeds into a special trust account designated for this purpose. These trust accounts are normally maintained by banks, trust companies or other financial institutions. They are often referred to as a"3rd party facilitator".

Sellers have a maximum of 180 calendar days from the closing of the initial sale to complete the exchange. Within the first 45 days of this period a seller must designate candidate properties and properly identify them.

A seller may target up to three properties regardless of value or a group of properties with a combined value that does not exceed 200 percent of the value of the initial property sale. The funds in a trust account can be used as earnest money for designated property once all IRS requirements for a 1031 transaction are met.

If no new properties are identified in the first 45 days, or no designated transaction is completed during the full 180 day period, the trust will be disbursed and the proceeds will be returned to the investor and will be taxed at the prevailing capital gains rate.

(This is an important point.) If you are considering a real estate transaction that will utilize the 1031 Exchange concept, it is important to make this decision PRIOR to the actual close of escrow of the property you will be selling as part of the exchange.

We can put you in touch with the needed "3rd party", and work with you to assist in the listing and sale of the property you will be selling, and also thru the selection of the new property you will be acquiring.

(This is not to be considered legal, or tax advice. Each individual has their own tax and financial issues. We recommend that appropriate legal and tax counsel be sought for legal and tax issues.)