Understanding
1031 Exchange Process
Like Kind Exchanges, also known as tax deferred exchanges, are defined by Internal Revenue Code (IRC) section 1031. A 1031 Tax Deferred Exchange offers taxpayers one of the last great opportunities to build wealth and save taxes. By completing a 1031 Exchange, the Taxpayer (“Exchanger”) can dispose of investment or business-use assets, acquire replacement property and defer the tax that would ordinarily be due upon the sale.
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If exchange investment property exclusively for “like-kind” investment property, there is no immediate tax liability thereby making the exchange a desirable option for investors eager to keep the property’s equity for re-investment.
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With a 1031 exchange, the replacement property must be identified within 45 days and acquired within 180 days of the sale of the relinquished property. To be eligible for a safe harbor tax deferral, the proceeds must be held by a qualified intermediary between the time of the sale of the relinquished property and the purchase of the replacement property.
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The most common exchange structure is the delayed “forward” exchange in which the Relinquished Property is sold, the proceeds (Exchange Funds) are delivered to the Qualified Intermediary, and are subsequently used to acquire Replacement Property from a third-party seller.