1031 Exchange

The down stock market the last several years has pushed many investors into real estate investments (apartments, condominium rentals, multi-family housing, vacation rentals, etc). The Taxpayer Relief Act of 1997 allowed those with primary residences to exclude up to $500,000 of gain (for couples) and $250,000 (single filers) on the sale of their homes. Among the requirements for the exclusion were that the home must have been the primary residence of both spouses at least 2 of the last 5 years. Investment properties, vacation homes and second homes do not qualify.

Many investors may be unaware that they can potentially defer 100% of their capital gain taxes, both state and federal on the sale of their investment property if they follow the guidelines of Internal Revenue Code Section 1031. The provisions of IRC Section 1031 stipulate that properties of like-kind may be exchanged and 100% of the capital gain taxes will be deferred. Real estate which can be exchanged under IRC 1031 as "like-kind" is extremely broad and is supported by numerous Revenue Rulings and Private Letter Rulings that have addressed the subject.

Another requirement of IRC 1031 is that the property to be acquired must be of equal or greater value than the property that was just exchanged. There is an "Identification Period" of 45 days in which an exchanger must identify potential replacement properties and a 180 day "Total Exchange Period" in which the exchange must have taken place. These are just some of the issues to be considered to comply with the IRC. Knowledge of IRC 1031 is key in helping the savvy investor to build wealth in investment properties.

Investors are urged to seek independent legal/tax guidance on each transaction as circumstances often change and can affect the validity of an exchange. I am not a CPA or lawyer and I do not provide legal advice. Every investor should always seek the advice of their tax and/or legal advisors regarding their specific situation.