1031 property exchange

It is a transaction under United States law. It specified that if an asset is sold and the proceeds of the sale i.e. cash be reinvested in a like kind asset. Moreover there should not be any gain or loss out of that transaction. Simply it is an exchange of an asset with like kind asset. There is no federal tax for this transaction. A specified for i.e. 1031 prescribed under section 1031 of U.S.internal Revenue Code. The process of exchange is selling of a property and then buying another property which is identical transaction is called 1031 property exchange .. It is just not sale and purchase. The persons should be same and the property should be like kind.

MAJOR RULES

In order to qualify the 1031 property exchange rule, the following should be taken into account.

  • The total purchase price of the replacement like kind property must be equal to or greater than total net sales price of the relinquished, real estate, property.
  • All the equity received from the sale, of the relinquished real estate property, must be used to acquire the replacement with like-kind property.

    • If the above rules violated, it automatically attracts tax liability accrued to the person executing the exchange. If replacement property purchase price is less, the tax responsibility incurred. The amount of difference will be taxed as BOOT. The boot means non like kind real estate property.

    PERIODS

    EXCHANGE PERIOD : This is the period within which a person who has sold the relinquished property must receive the replacement property. It is called Exchange period under section 1031 property exchange rule. This period ends at exactly 180 days after the date on which the person transfer the property relinquished or the due date for the person's tax return whichever is earlier. It is also to be noted that 180th day is final even if it falls on a Saturday, Sunday or Legal Holiday of US.

    IDENTIFICATION PERIOD : This the period during which the party selling a property must identify other replacement properties which he proposed or wishes to buy. It is better not to select more than one property. This period is scheduled as exactly 45 days from the date of selling the relinquished property. This 45 days time line must be followed under any circumstances. This period is not extend able in any way. Remember even 45th day falls on a Saturday, Sunday or Legal US Holiday, it is not extendable.

    HINTS

  • Like Kind : Like kind means nature of character of the property. The two properties must be same type. For example, two residential pieces of real estate are like-kind towards of another. A residential piece of real estate and acar would not be like kind.
  • Limitation: There is no limitation for replacement of property i .e. the exchange of property can be done with one property and with more than one properties of other side. Hence sale may be for one property and purchase may be for more than one property but which is like kind are acceptable under section of 1031.

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