What Are Exchange Properties?
A 1031 exchange is a great option to use if you have a business or investment property that you would like to sell but have concerns about taxable recapture. When you exchange properties there are some significant tax deferred benefits, whether you still owe on the property or if you own it outright.
The Internal Revenue Code section 1031 will allow you to defer taxes on capital gains if you exchange rather than sell your property, and it is available to both personal property owners and real estate owners. A 1031 property exchange may save you as much as 15 to 35% in state and federal taxes on each dollar of gain, depending upon your particular state’s tax rates. Of course there are certain guidelines and a few basic steps that need to be followed in order to take advantage of this type of tax deferred 1031 exchange. And, keep in mind that this tax deferred exchange is one of the few remaining tax benefits approved by the IRS.
The Internal Revenue Service has two main conditions that need to be met in order for property to qualify as exchange properties under the section 1031 exchange code; they define it as a “like-kind” exchange and that is the entire key to having the transaction validated.
The two types of property that are considered allowable as exchangeable properties according to the Internal Revenue Service are properties that are held for a productive use of trade or business and/or property that is used for investment purposes. If the owner determines that their property will qualify as a 1031 like kind exchange, then there are two additional steps that need to be taken so that they can take full advantage of the tax deferment. One of these steps is to acquire the replacement property, keeping in mind that it must have a value that is at least as much as the property that they wish to exchange. The second step is that all of the equity from the exchange property must be transferred to the replacement property. If these two steps are completed, then the tax free transaction should take place with no problems.
Naturally, within the area of a qualified tax deferment important rules and provisions do exist, which deal mainly with the problem of delayed exchanges. There is a set amount of time that the transaction concerning exchange properties has to occur according to the Internal Revenue Service’s guidelines, and that is 180 days. The transaction also has to follow the rules that pertain to identifying qualified replacement properties that are going to be acquired, as the rules used are key to the completion of any 1031 exchange and qualifying for a tax deferment. It is also a very good reason to use a good qualified exchange intermediary and an experienced tax attorney or advisor.
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