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What is a 1031 exchange?

The 1031 exchange, is also known as the tax-deferred exchange or real estate exchange, was created in 1990 by the I.R.S. A 1031 exchange is the process of selling one investment for the purchase of some other investment. When used with a mortgage, homeowner's will typically sell 1 of their investment properties to buy some other, similar property, they can offset or straight out avoid capital gains tax.In a 1031 exchange, the property or properties which are sold is called a "released holding" and the property obtained is called "replacement property". Before the creation of the 1031 exchange, an owner had to sell 1 holding ahead of the close of escrow on the new property, a practice which proved to be very difficult. The I.R.S. at long last advised a resolution with the creation of the 1031 exchange, which effectively permitted a homeowner to sell the released property and apply the proceeds to purchase the replacement property later. Inorder for the exchange to work properly, it must be managed by a qualified intermediator and certain regulations have to be followed.Real estate is divided into four categories, including property held for business use, investment property, personal property, and property held mainly for sale. The first two allow for a 1031 exchange, while the last two don't. All proceeds from the released holding sale must go towards investing in the replacement property. The properties exchanged must be of like-kind, meaning that classification of the properties is the same, and not based on their quality or condition.There are also particular time requirements that need to be strictly followed. The designation period of the 1031 exchange starts the particular date the relinquished property is transferred and expires after 45 days. The exchange period starts on the date you reassign the relinquished property and stops after 180 days or before if tax returns for the taxable year are submitted before those 180 days.There needs to be an actual exchange supervised by a qualified intermediary, and not only a transfer of property for money only. It's always wise to seek the services of a professional early on to fend off any pricey errors when executing a 1031 exchange.Beneath are many of the rules that need to be adhered to:1. The new property needs to have an appraised value equal to or larger than the property being sold2. All monies from the sale of the relinquished property must go towards the substitute property 3. The holding must be substituted for the comparable type of property 4. The property must classified as an investment property, in other words; not as a primary, second home or vacation property. 5. The exchange needs to occur in the assigned time frame

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