Overview of the 1031 Exchange Process |
Provision 1031 of the U.S. Income Tax Code allows owners of investment property, be it commercial, industrial, residential, or vacant land to sell that property and defer capital gains taxes by exchanging the proceeds, through an intermediary, for an investment in another like-kind property or group of like-kind properties. |
| To affect an exchange, the seller
places all sale proceeds into a special trust fund account designated for this
purpose. These trust accounts are normally maintained by banks, trust companies or
other qualified intermediaries. Sellers have a maximum of 180 calendar days from the closing of the initial sale to complete the exchange. Within the first 45 days of this period a seller must designate candidate properties and properly identify them to the IRS. A seller may target up to three properties regardless of value or a group of properties with a combined value that does not exceed 200% of the value of the relinquished property. The funds in the trust account can be used as earnest money for the designated property once all IRS requirements for a 1031 transaction are met. If no new properties are identified in the first 45 days and no designated transaction is completed during the full 180-day period, the trust will be liquidated and the sale proceeds will be taxed at the prevailing capital gains rate. |
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