1031 Exchange &
Reverse 1031 Exchange
A way for real estate investors to sell properties without paying capital gains.
A 1031 exchange is a program that allows real estate investors to swap out an investment property for another and defer capital gains, losses, or capital gains tax that you otherwise would have to pay out at the time of sale.
In contrast, a reverse 1031 exchange works in the opposite direction. In a reverse 1031 exchange, the taxpayer acquires the replacement property (the property they want to exchange into) before selling their original property (the relinquished property). This can be beneficial in situations where real estate investors find a property they want to purchase before selling their existing property within the 1031 exchange timeline.
While 1031 Exchange and Reverse 1031 Exchage programs may be able to save you considerably, it's best to consult with a tax specialist and the lending team at NW Alternative Mortgage to find out if you qualify.
1031 Exchange & Reverse 1031
Rules And Requirements
The property you exchange must abide by certain requirements:
The replacement property must be like-kind, or of equal or greater value to the relinquished property. Both properties must be similar enough to qualify as “like-kind.” Most real estate can be like-kind to other real estate. For example, real property improved with a residential rental house is considered like-kind to empty land. Note that property within the United States is not like-kind to property outside of the United States.
The exchanged properties must be similar in nature and function. For example, a rental or multifamily property cannot be exchanged to acquire a vacation home. Personal use residences, such as a primary residence, second home or vacation home, do not qualify as like-kind exchanges. Actual property and personal property (which can include machinery, equipment, collectibles, vehicles, boats, aircraft, artwork, patents and other intellectual property) can both qualify as exchange properties under Section 1031 but actual property can never be like-kind to personal property. The rules are more restrictive for personal property as well. For example, cars are not like-kind to trucks.
You cannot hold the money made from a sale during the exchange at any time. All funds must be held in escrow by a qualified intermediary, or the proceeds will become taxable.
Section 1031 does not apply to these types of exchanges:
Stocks, bonds, or notes
Other securities or debt
You must also adhere to specific timelines with a 1031 tax exchange or the gain on the sale of your property may become taxable:
You have 45 days after the sale of your relinquished property to find potential replacement properties. You must do so in writing and share it with the seller or your qualified intermediary.
You must close on the replacement property within 180 days of closing on the relinquished property or after your tax return is due – whichever is earlier.