Long Island Real Estate Law Firms, Markotsis & Lieberman P.C., Explain 3 Frequent Questions About The 1031 Exchange Rule
When is it the right time to use the 1031 Exchange strategy?
The 1031 Exchange strategy can only be used for investment and business properties. When these types of properties are for sale, the seller is responsible for the payment of the capital gains tax. If the investment property for sale is worth more at the time of the sale than its original purchase price, a 1031 Exchange can assist the seller in having a significant amount of money available to be used toward the purchase of another investment property.
What properties qualify for this exchange?
Properties held for productive use such as investment, trade, or business are eligible for the exchange of like-kind property under the 1031 Exchange. In order for an exchange to be considered like-kind, the investment type must be the same. For example, an investment property can be exchanged for another type of investment property or a single-family residence can be exchanged for a duplex or office building. However, the exchange cannot occur between partnership shares, stocks, bonds, certificates, or personal residences. If an investor exchanges multiple properties in quick succession, those properties may be considered stock in place of investment properties and would not qualify. Once a property is approved for the 1031 Exchange, the next step is to determine what the replacement property will be. It is important to remember that when choosing a replacement property, the like-kind rule will apply.
How much time is needed to complete the 1031 Exchange?
From the time the relinquished property has been closed, the investor has 45 days to nominate potential replacement properties and 180 days from the closing date to acquire the chosen replacement property. Under the 1031 Exchange rule, an investor should nominate three replacement properties by midnight on the 45th day and then obtain one or more of the properties within 180 days. If an exchange requires more than 3 replacement properties, it may be best for the investor to reach out to their 1031 facilitator for additional information on unique situations.
The 1031 Exchange rule may be helpful for investors and real estate professionals alike. However, given the complexities of an exchange, be sure to consult with a 1031 facilitator and an experienced attorney throughout the entire exchange process for the best outcome.
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