1031 Exchange what is a 1031 tax deferred exchange?




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1031 EXCHANGE - WHAT IS A 1031 TAX DEFERRED EXCHANGE?

NOTICE OF DISCLAIMER-The IRS recommends that your tax advisor and/or attorney review and approve all exchange documents. We cannot advise you concerning the specific tax consequences of your transaction or event and will not able to comment on the advisability of conducting an exchange. You will need to seek the counsel of your attorney and/or tax accountant for advice surrounding the details of your transaction.

A 1031 tax deferred exchange is the method by which a taxpayer who owns property which has been held for investment or in connection with a trade or business can exchange the property for like kind property which will be held for investment or in connection with a trade or business and defer paying taxes on some or all of the capital gains. For investments held by individuals, the deferral can continue through any number of exchanges until the tax liability is extinguished by death. The regulations which govern exchange transactions are in Section 1031 of the Internal Revenue Code.
The 1031 tax deferred exchange is a powerful tool. Long favored for estate planning, an exchange can be employed to leverage, consolidate or diversify assets.
EXCHANGE TERMINOLOGY
Exchangor/Taxpayer - The entity or individual who wishes to participate in a 1031 tax deferred exchange.
Relinquished Property - The property which the Exchangor currently owns and is going to exchange.
Exchange Credit - The funds received from the transfer of the Exchangor's relinquished property.
Replacement Property - The property which the Exchangor acquires in the exchange.
Growth Factor - The interest earned on the exchange credit.
Like Kind Property - Replacement property acquired in an exchange must be of "like kind" to the property being relinquished. All real property is of like kind, regardless of whether it is improved or unimproved, and regardless of the type of improvements. EXCEPTIONS: 1) Real property located outside of the United States; 2) Exchangor’s primary residence;

3) Inventory; and 4) Improvements constructed after the Exchangor takes title to the replacement property.


Boot - Non like kind property received by the Exchangor such as cash or a promissory note. Boot is taxable.
EXCHANGE DEADLINES
Identification Period

The Exchangor must identify replacement property(ies) within 45 days from the date of the first relinquished property closing.


Exchange Period

The exchange must be completed by the earlier of: 1) 180 days from the date of the first relinquished property closing; or 2) the due date of filing Exchangor's federal income tax return, together with all extensions, for the year the first relinquished property was transferred.


IDENTIFICATION RULES
3 Property Rule

Up to three (3) properties can be identified without regard to their fair market value.


200% Rule

Any number of properties as long as their combined fair market value does not exceed 200% of the fair market value of all relinquished property.


95% Rule

Any number of properties regardless of their aggregate fair market value, provided 95% of the value of the identified properties are acquired.









NOTICE OF DISCLAIMER-The IRS recommends that your tax advisor and/or attorney review and approve all exchange documents. We cannot advise you concerning the specific tax consequences of your transaction or event and will not able to comment on the advisability of conducting an exchange. You will need to seek the counsel of your attorney and/or tax accountant for advice surrounding the details of your transaction.


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