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What is a 10-31 Exchange?

A 1031 exchange allows an investor to “defer” paying capital gains taxes on an investment property when it is sold, as long another similar property (like-kind) is purchased with the profit gained by the sale of the first property.

An investor will eventually cash out and pay taxes, but in the meantime, an investor can trade properties without incurring a sudden tax obligation. However, the 1031 Exchange Rules require that both the purchase price and the new loan amount be the same or higher on the replacement property.

6 Rules to follow when doing a 10-31 Exchange:

  1. Like-Kind Property: To qualify as a 1031 exchange, the property being sold and the property being acquired must be the same nature or character, even if they differ in grade or quality.

  2. Investment or Business Property Only: A 1031 exchange is only applicable for Investment or business property, not personal property. In other words, you can’t swap one primary residence for another.

  3. Greater or Equal Value: IRS requires the net market value and equity of the property purchased must be the same as, or greater than the property sold. Otherwise, you will not be able to defer 100% of the tax.

  4. Same Taxpayer: The tax return, and name appearing on the title of the property being sold, must be the same as the tax return and title holder that buys the new property.

  5. 45 Day Identification Window: The property owner has 45 calendar days, post-closing of the first property, to identify up to three potential properties of like-kind.

  6. 180 Day Purchase Window: To qualify under a 1031 exchange it’s necessary that the replacement property be received and the exchange completed no later than 180 days after the sale of the exchanged property OR the due date of the income tax return.



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