What is a 1031 Exchange?

A 1031 exchange is a tax strategy that allows you to defer capital gains taxes on the sale of a like-kind real estate property. Section 1031 of the IRS code says that if you sell a like-kind investment property and reinvest the proceeds into another piece of higher value real estate, you don't have to pay capital gains taxes on the sale. Since no cash proceeds are given back to the seller in this scenario, there is no amount to be taxed by the IRS.

Why You Need a Qualified Intermediary (QI)

According to IRS guidelines, the exchange must go through a special facilitator called a Qualified Intermediary (QI). The QI's job is to hold your cash proceeds from the sale of your old property and prepare the legal documents for your exchange. The QI then forwards the cash to the closing agent of the new property to complete the purchase. 

Choosing the Right QI

Finding a qualified and trusted QI is important because they will be holding your money. The QI you use must be an independent third party, and cannot be a friend, employee, broker, or even your CPA or attorney. How do you find reputable QI that will make the process easy? Turn to Folkers & Associates, CPAs. We'll explain how the 1031 exchange process works and will help you get started.

Call us now at (949) 399-1040 now or request your consultation to learn more. Or, if you're ready you can start an exchange online now.

IRS Rules for 1031 Exchange

There are many benefits to a 1031 exchange. But as with any part of the IRS tax code, there are rules and regulations governing this process. But if you play the rules, you stand to see big tax savings on your real estate investments. In order for an investor to take advantage of a 1031 exchange, the following criteria must be met:

Real Property Use

Both the like-kind property you are selling and the one you are buying must be held for investment or income producing purposes to qualify for a 1031 exchange. 

45-Day Limit

You must identify the replacement property within 45 days of close of sale

180-Day Exchange Closing Period

From the date of closing on the sale of the old relinquished property, you will have 180 days to close on a new replacement property.

Proper Title Holding

The taxpayer that sold the old property must be the same taxpayer to buy the new one.

Reinvestment Requirement

In order to defer all of your capital gains tax, you must reinvest all the cash proceeds from the sale to buy a new property equal or higher in value than the one you sold.