Things to Know about 1031 Exchange
A 1031 exchange, named after Section 1031 of the U.S. Internal Revenue Code, allows investors to defer paying capital gains taxes on an investment property when it is sold, as long as another similar property is purchased with the profit from the sale. Traditional Abstract provides 1031 exchange in Allentown, Nazareth, PA, Bethlehem, PA, Lehigh Valley, Easton, PA and surrounding regions.
- Eligibility: To qualify for a 1031 exchange, the properties involved must be used for business or investment purposes, not personal residences. The properties must also be of “like-kind,” meaning they must be of the same nature or character, though they don’t need to be identical.
- Timeline: The exchange must follow strict timelines. From the date of the sale of the original property, the investor has 45 days to identify potential replacement properties and 180 days to complete the purchase of one of those properties.
- Qualified Intermediary: A qualified intermediary (QI) must be used to facilitate the exchange. The QI holds the proceeds from the sale of the original property and uses them to purchase the new property, ensuring the investor doesn’t have direct access to the funds.
- Identification Rules: During the 45-day identification period, the investor can identify up to three potential replacement properties, or more if they meet certain value conditions. The replacement property must be acquired within 180 days of the sale of the original property.
- Tax Deferral: The 1031 exchange allows for deferral of capital gains taxes, but it does not eliminate them. If the new property is later sold without another 1031 exchange, the deferred taxes will be due.
- Depreciation Recapture: Depreciation taken on the original property will carry over to the new property. When the replacement property is eventually sold, the depreciation recapture rules will apply, potentially increasing the tax liability.
Understanding these key aspects of a 1031 exchange can help investors strategically manage their investment properties and tax liabilities.
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