1031 EXCHANGE

You're thinking of investing in Real Estate, you've heard of the 1031 Exchange Law, you should know what this means before you begin, but you have no idea. The 1031 Exchange Law (also know as a Starker exchange or Tax-deferred exchange) is simple yet complicated. You need to know the basics but must hire a qualified intermediary such as an investment consultant, real estate agent or tax consult, to manage your exchange.

A 1031 Exchange is governed by section 1031 in the Internal Revenue Code, (hence the name). A 1031 Exchange allows an investor to sell and buy investment property (this law does not pertain to primary residences) without the consequences of Capital Gains Tax and Depreciation Recapture Taxes. So how can you get in on this deal?

That is the simple part. A 1031 Exchange must meet a few simple requirements. The sold property and the acquired property must be of "like-kind". With respect to real estate this means that any form of investment can be traded for another without subject to tax. An empty plot of land could be traded for a duplex.

There is of course a catch. A 1031 Exchange requires that the acquired property must of equal or greater value to the sold property. Since as a regular course of action, investors trade up, this should not be an issue.

There are also time frames involved in a 1031 exchange. Once a property is sold the investor has 45 days from closing to identify potential replacement properties. A replacement property must be purchased (final closing) with in 180 days of the sale of the relinquished property.

Lastly, be aware that a 1031 exchange must be set up prior to the sale of the relinquished property. Additionally the investor must not ever have possession of the funds from the sale; it must be handled by an agent.