By utilizing the selling proceeds to buy a property that is similiar to the one being sold, an investor can use a 1031 exchange, sometimes referred to as a like-kind exchange, to postpone paying taxes on the sale of an investment property. The general procedure for a 1031 exchange is as follows:
Decide which property you want to sell and which property you want to buy in its place. Within 45 days of the sale of the original property, the locations of both properties must be determined.
Close on the sale of the initial property and deposit the money earned into a QI (qualified intermediary) account. The QI will keep the money while serving as an impartial third party in the deal.
Purchase the replacement property using the sale’s earnings. The replacement property must be acquired within 180 days of the original property’s sale, or before the sale’s tax due date, whichever occurs first.
The value of the replacement property must be equal to or higher than the value of the original property, and the replacement property’s debt must be equal to or higher than the original property’s debt.
To demonstrate compliance with the requirements of a 1031 exchange, complete all required papers and file documentation of the exchange with the IRS.
It is crucial to remember that there are stringent guidelines that must be fulfilled in order to be eligible for a 1031 exchange, and doing so can trigger a taxable event. Before starting a 1031 exchange, it is usually advisable to speak with a skilled tax practitioner.