If your future involves the ownership of business or investment property it is essential to understand how to properly navigate the fine print of IRS Code 1031 (AKA complete a 1031 Exchange) and strategically defer taxes on capital gains. Reference the Dos and Don’ts below and contact us – we’re happy to be a resource:
- Make sure you’re using a Qualified Intermediary (QI). A QI is an independent professional who has not provided representation to you as an agent within the past 2 years. Your QI will prepare legal documents and hold your money in between the close of your sale and your subsequent purchase.
- You must exchange “like for like”. For example, domestic property for domestic property or foreign property for foreign property. Both the initial and new properties must be used for business or investment purposes.
- Remember: in order to defer taxes on capital gains one must exchange for a property of equal or greater value. All cash from the proceeds of the sale must be reinvested – otherwise taxes will be paid on the difference.
- Don’t forget that time is of the essence. You will be given 45 days from close of the sale to list a few properties of interest (for purchase). This is called the “Identification Period” and it includes weekends and holidays. In addition, you are given 180 days from close of the sale of the first property to close on the new property.
- Don’t forget to clearly identify to all parties involved that you are pursuing a 1031 exchange.
- Don’t forget that the basis for the profit you make on the exchange stays the same; the fair market value does not constitute your basis.