1031 Tax Exchange - What You Should Know

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.

In English, this basically means 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. This must occur within a specified time frame and with the help of at least one facilitator to keep you on the right track.

To be compliant with the guidelines of a 1031 tax 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 followed 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.

The best thing to do is speak with your real estate agent/broker about this type of transaction so that you can be connected with a QI. Honestly, the QI will be the most important person in this transaction as he/she will be responsible for the logistics.

Please use the following link to view federal law regarding 1031 tax exchanges:

https://www.irs.gov/businesses/small-businesses-self-employed/like-kind-exchanges-real-estate-tax-tips