What is a 1031 Exchange?
The 1031 Exchange gets its name from the Internal Revenue Service's (IRS) section 1031 of the tax code. This code allows property investors to defer capital gains taxes on eligible properties where the proceeds are used to purchase (ie. exchange) for other eligible properties.
When the owner of the property passes, the inheritors receive the property on a stepped-up basis. This means the capital gains tax effectively disappears and the property is valued at the current fair market value.
What are the requirements for a 1031 Exchange?
Some of the common things to know when using a 1031 exchange include:
- 180 days. Performing the exchange within 180 days from the date the deed records or the date the property is transferred to the buyer (ie. closing date).
- 200% Rule. The fair market value of the exchanged properties cannot exceed 200% of the relinquished properties.
- 95% Rule. The exchanged properties must be a minimum of 95% of the relinquished properties.
- Qualified Intermediary. The agreement must be done in conjunction with a Qualified Intermediary and the exchanger must hold the relinquished property's proceeds in an escrow account.