A 1031 exchange is commonly used to defer the capital gains taxes from the sale of investment property, provided that funds are “exchanged” or reinvested in like-kind property, which is broadly defined as property held for investment or business purposes. When done correctly, this allows you to defer 100 percent of the capital gains taxes on the sale of real estate.
However, to the dismay of many homeowners, you cannot use your primary residence in a 1031 exchange. In order to do so, the law requires that you are not occupying the home and most experts agree that the home should be leased to a non-owner at fair market value for at least 2 years before initiating the exchange.
In a nutshell, the main requirements for a 1031 exchange are:
- Buyers must purchase another “like-kind” investment property.
- The replacement property must be of equal or greater value .
- The buyer must invest all of the proceeds from the sale .
- The transaction must be with the same title holder and taxpayer.
- The replacement property must be identified within 45 days from the initial sale.
- The transaction must take place within 180 days of the sale of initial property.
It’s important to defer to a tax expert when making decisions about how to apply certain tax laws to future real estate transactions. Sue Kohl Real Estate is happy to refer you to a trusted expert if you’d like more information.