1031 Exchanges

For those thinking of selling their investment properties there is a tax law that can help you defer paying taxes on the gain created from the sale of those properties to a later date: a 1031 Exchange.

A 1031 exchange, also known as a Starker Exchange or a Tax Deferred Exchange, is an exchange of property for other like-kind properties. It usually requires a qualified intermediary that holds the sale proceeds for a short period of time while the taxpayer indentifies other like-kind properties of equal or greater value than the value of the relinquished property. All the net proceeds are then used to purchase the future replacement properties and once the properties are sold the taxpayer is then liable for the deferred gain.

There are set time limits for an exchange to occur successfully. The first being the identification period of the replacement property. An owner has 45 days to identify the replacement properties and an additional 135 days to go to settlement. If these time periods are not met than the exchange fails and the taxpayer will have to pay any taxes arising from the sale of the relinquished property. The taxpayer can identify 3 replacement properties or more as long as the value of these properties does not exceed twice the value of the relinquished property. The properties identified must be for trade or business use and not real estate for personal use even though later on it can be converted to personal use.