Under Section 1031 of the United States Internal Revenue Code (26 U.S.C. § 1031), a taxpayer may defer recognition of capital gains and related federal income tax liability on the exchange of certain types of property. This is also referred to as a “Like-Kind” exchange. Basically, a property owner must sell one investment property and purchase another investment property with the goal being to defer payment of capital gains tax associated with the sale of the property being sold.
To be in compliance with the guidelines of a 1031 exchange, a property owner must sell a current investment property and purchase a similar property using the services of a Qualified Intermediary (QI).
Specific guidelines must be adhered to in order to remain in compliance with this type of transaction. The most important of which are timelines for identifying the property which will be purchased using the proceeds from the sale of the original property as well as for closing on the identified or replacement property.