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What is a 1031 Exchange or tax-deferred exchange?
It is a process that allows a taxpayer to exchange an investment or business property and defer the payment of the capital gains tax.
What property qualifies?
The properties must be like-kind. This means that the property being relinquished must currently be used as an investment or business property. It is not important how the buyer plans to use the property.
What is the 45-Day Rule?
The replacement property the exchanger desires to purchase must be identified in 45 days, be anywhere in the United States, and be settled in 180 days.
How are capital gains figured?
The potential capital gains that can be deferred is simply the profit plus all the depreciation taken on the property being relinquished.
What are the reinvestment requirements in an exchange?
To be totally tax free, the acquisition cost of the replacement property(ies) must be equal or greater than the adjusted sale price of the relinquished property.
The total cash equity (equity less selling costs) from the relinquished property must be held in a qualified escrow account and must be reinvested in the replacement property(ies). The cash not reinvested (known as “cash boot”) is subject to capital gains tax.
The replacement property must have mortgage debt or new cash added, equal to or greater than the mortgage paid off, or assumed on the relinquished property.
What are reverse Exchanges?
A “reverse” exchange occurs when the taxpayer acquires the replacement property before transferring the relinquished property.
What are improvement Exchanges?
An Improvement Exchange allows the investor to construct the “perfect” replacement property in order to acquire precisely what is desired.