What is a 1031 Tax Deferred Exchange?

Section 1031 of the Internal Revenue Service

Section 1031 of the Internal Revenue Service offers the real estate Investor a remarkable opportunity to sell one parcel of real estate and use the entire proceeds to aquire replacemant real estate, without paying taxes on any gain from the sale. By careful planning and strict adherence to the safe-harbor provisions of the I.R.S. regulations (below), Investors can protect the full value of their appreciation and equity, expand their holdings of investment property and defer payment of tax on capital gains indefinitely.

Section 1031 of the Internal Revenue Service states:
"No gain or loss shall be recognized on the exchange property held ... for investment, if such property is exchanged solely for property of like-kind which is held ... for investment"

Safe-Harbor Requirements of Section 1031

• Replacement property must be properly identified within 45 days of closing on relinquished property.
• Replacement property must be acquired within 180 days of closing on relinquished property.
• Aggregate replacement property must be equal to, or greater in value than, the relinquished property.
• Debt on the replacement property must be equal to, or greater than, debt on the relinquished property.

What do I need to know?

What kind of property qualifies for a 1031 tax deferred exchange?

Any type of investment real estatemay be exchanged for any other type of real estate, provided thereplacement real estateis likewise held for investment, and not immediately used by the INVESTOR as a personal residence.

Can I complete a tax deferred exchange by myself by somehow segregating the proceeds from the sale of my relinquished property and then using those funds to acquire a replacement property?

NO, actual or constructive receipt by the INVESTOR of all or any portion of the proceeds of sale of the relenquished property will defeat the tax deferred exchange and require the INVESTOR to pay tax on any gain realized.

How can I avoid constructive receipt of the proceeds of sale of the relinquished property so that I can complete a tax deferred exchange?

Through the use of a qualified Intermediary, such as KENTUCKY TITLE, INC., an accommodation party who is not a disqualified person or entity pursuant to the I.R.S. regulations, the INVESTOR can avoid being deemed to be in actual or constructive receipt of the sales proceeds pending acquisition of the replacement property.

Can I exchange into more than one replacement property?

YES, and in many tax deferred exchange transactions, the INVESTOR will leverage the exchange proceeds to acquire more or higher quality properties than what the INVESTOR started with.

Can I acquire a vacation or second home in a tax deferred exchange?

NO, both the relinquished and replacement properties must be properties "held for investment". Property that is the residence of the INVESTOR will not qualify under the I.R.S. regulations. Nevertheless, a residential property acquired in a vacation area may qualify as long as that property is not used for a period of time after acquisition as the residence of the INVESTOR, but rather held for investment, such as rental.

How do I identify replacement property in a tax deferred exchange?

Replacement property must be identified in writing to KENTUCKY TITLE, INC., within the appropriate time period. The INVESTOR may identify up to 3 properties, regardless of the value, OR any number of properties , as long as their total value does not exceed 200% of the valueof the relinquished property, OR any number of properties of any value, as long as the INVESTOR acquires at least 95% of the identified properties in the exchange.

Can I change my mind and not complete the exchange?

YES, an INVESTOR can change his/her mind at any time prior to completion of the exchange and the sale of the relinquished property will become a taxable transaction. any exchange proceeds held by KENTUCKY TITLE, INC., will be returned to the INVESTOR, subject only to compliance with restrictions in the I.R.S. regulations concerning timing for return of funds not used to acquire replacement property.

How much does a 1031 tax deferred exchange cost?

The cost to set up a tax deferred exchange are minimal, KENTUCKY TITLE, INC. charges fixed rate fees that are competitive with the lowest fees charged by qualified intermidiaries across the country.

Visit Us

Address: 4500 Bowling Blvd. Suite 100
Louisville, Kentucky 40207
USA Phone Number: (502)548-5101 Alternative number: (502)894-6006 Email: sfrank@KentuckyTitle1031.com Business Hours: 8am to 6pm Monday through Friday