1031 EXCHANGE EXPLAINED
A 1031 exchange is not an exchange in the barter sense. It involves simply the sale of a property and the purchase of another property under certain guidelines. The result is the indefinite deferral of capital gains taxes on the sale. Specific guidelines for an exchange are summarized on our web site on the pages titled “Property that Qualifies”, and “Replacement Property Criteria.”
EXCHANGE TYPES:
1. DELAYED EXCHANGE (often referred to as “Starker Exchange”) was codified in the 1984 Tax Reform Act; and it is by far the most common type of exchange. After the closing on the sale of your property you have 45 days in which to identify replacement property (or properties), and 180 days in which to close on the purchase of the replacement property.
2. REVERSE EXCHANGE is simply the reverse of a delayed exchange. This occurs when an investor identifies and purchases replacement property prior to the sale of property he relinquishes. Federal guidelines for a reverse exchange were issued September 15, 2000 so we have safe harbor rules to follow.
3. AN IMPROVEMENT EXCHANGE allows the investor to construct a new replacement property within certain guidelines including time constraints.
Qualified Intermediary (Facilitator)
In order to properly complete a 1031 exchange and defer capital gains tax, the proceeds from the sale of your property must be kept by a “Qualified Intermediary” until it is used for the purchase of a replacement property. We can assist you in finding a Qualified Intermediary to help facilitate the exchange.
