1031 TAX DEFERRED EXCHANGE

WHAT IS A 1031 TAX DEFERRED EXCHANGE?

Under section 1031 of the Internal Revenue Code a property owner can sell his property and then invest the proceeds in the purchase of a like-kind property within a specified time.

This is a simple strategy and method for selling your property and deferring the taxes, since it is treated as an exchange of properties and not a sale. Keep in mind, It must stay within the "Like -Kind Exchange Regulations, issued by the US Department of the Treasury, and all of the equity received from the sale of the relinquished real-estate property must be used to acquire the replacement like-kind property. Also, the total purchase price of the replacement property must be equal to or greater than the net sales price of the exchanged property.

Any property owner or investor of Real Estate, should consider an exchange when he or she expects to acquire a replacement like-kind property. By using the 1031 exchange method, you can possibly save 20 10 30% you would have paid in Capital Gains tax.

Section 1031 does not apply to exchanges of inventory, stocks, bonds, notes, or other securities or evidence of indebtedness.

LIKE KIND PROPERTY: Properties are of like-kind if they are of the same nature or character, even if they differ in grade or quality. Generally, if you exchange business or investment property solely for business or investment property of a like-kind, no gain or loss is recognized under Internal Revenue Code Section 1031.

OWNERSHIP AND USE TESTS: To claim the exclusion on your residence, you must meet the ownership and use tests. This means that during the 5-year period ending on the date of the sale, you must have: * Owned the home for at least two years. (the ownership test) * Lived in the home as your main home for at least TWO years. (the use test)

QUALIFIED INTERMEDIARY: The 1031 Exchange rule demands that all proceeds of a 1031 exchange go through the hands of a qualified intermediary, and not the hands of the title company, your Real Estate Broker, or any other 3rd party or it will become taxable. There are specific 1031 Exchange companies that your title company will work with to insure your interests are protected.

IDENTIFICATION PERJOD: This is the crucial period during which the party selling a property must identify another replacement property. It is not uncommon to select more than one property, The selling party has exactly 45 days from the day of selling the relinquished property to identify the replacement property.

EXCHANGE PERIOD: The person who has sold the relinquished property has exactly 180 days in which to receive the replacement property.

For more information, check with your CPA