What is a 1031 Tax-Deferred Exchange?

It’s a great way for an investor to build wealth and defer taxes that would otherwise be due on a straight sale.

The Internal Revenue Code states that neither gain nor loss is recognized if a property held for investment or productive use in a trade or business is exchanged for (Like-Kind) property.

The taxpayer may avoid the taxable sale and purchase and qualify for Exchange treatment if, prior to the sale of the old property, the taxpayer enters into an Exchange Agreement with a "Qualified Intermediary" (one of the IRS requirements for a tax deferred exchange is that an independent third party handle the exchange transaction.), who structures the exchange transactions properly to meet all of the requirements of the Code and the Regulations.

• Primary residence
• Partnership interests
• Money
• Stock, Bonds or Notes
• Foreign Property

Delayed Exchange Time Frame

The most common exchange today is the delayed exchange.
There are two very important time frames to keep in mind. You have 45 days from the recording of the deed to identify your possible replacement properties. You have a total of 180 days to close on your replacement properties. No exceptions or extensions.

Identifying Replacement Property

When Identifying Replacement Property in your exchange, you have two choices. You can use the Three Property Rule or the 200% Rule.

The Three Property Rule allows you to identify up to 3 properties. You can purchase one, two or all three of those properties to complete your exchange. If you wish to purchase more than three properties, you will need to identify under the 200% Rule.

The 200% Rule is set up for you to identify as many replacement properties as you wish as long as the aggregate fair market value of all the identified properties does not exceed 200% of the relinquished property value. You may purchase any combination of these identified properties keeping in mind to be totally tax deferred you should purchase properties equal or greater in value to your relinquished property.

An exception to this rule is called the 95% rule. You can choose to identify more than 200%, but if you do, you must purchase 95% of the values you identified or your entire exchange fails.