What is a 1031 Exchange?
Owners of business or investment real estate that want to sell the property can make use of a significant tax-saving tool. Under IRC Section 1031, an owner can dispose of existing business or investment property and acquire new property(-ies), and the proceeds from the sale of the relinquished property can be used to acquire the replacement property while deferring any capital gains tax due on the relinquished property. This kind of transaction is known as a 1031 exchange, and there are three key requirements for an owner to qualify to defer capital gains taxes under IRC Section 1031:
The relinquished property and the replacement property must be held for productive use in a trade or business or for investment.
The relinquished property and the replacement property must be of “like-kind.”
There must be an “exchange” as distinguished from a “purchase and sale.”
The exchange of properties does not have to be simultaneous. The 1031 exchange regulations permit an exchangor to dispose of the relinquished property and then acquire the replacement property up to 180 days later. To do so, the exchangor must identify the replacement property within 45 days after the relinquished property is transferred, among other requirements.