A 1031 Exchange is a method of deferring capital gain taxes when selling your property.
Most investors should consider the advantages in deferring or avoiding payment of taxes on the disposition of property. Three principal methods accomplish this objective: installment sales, Like-kind exchanges (1031 Exchange) and distribution at death. The most common one is the 1031 Exchange.
Only real estate held for investment or for productive use in a trade or business may be exchanged for other real estate of the same character, called “like kind property”. The capital gain produced in “property 1” is exempt from taxes as long as “property 2” is purchased.
The replacement property must be identified within 45 days of the initial transfer, and title to the replacement property must be transferred within 180 days or before the tax return due date whichever occurs first. Often, the exchange is handled by a qualified intermediary, which simplifies the transaction.
Summary of the items necessary to do an exchange:
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