A Guide to 1031 Exchange Rules in Real Estate

How to do a 1031 Real Estate Exchange

How to do a 1031 Real Estate ExchangeAs an investor, you want to preserve your equity and save on taxes, and 1031 exchange services help you do just that by applying tax-deferred exchanges. According to the Internal Revenue Code, the payment for capital gain taxes can be deferred by selling your investment property and acquiring similar replacement property.

This exchange applies to any property, which is not your primary residence. It can apply to a primary residence only if it has a home office, or is for business use. Before getting 1031 exchange services in Nevada, there are various rules that you should learn first.

Properties that Qualify for 1031 Exchange

The 1031 exchange is categorically meant for all properties that are not primarily residential properties. However, there are certain cases where a certain part of your primary residence can be exchanged. For instance, you may exchange a former residence property, rental property, commercial property, a second/vacation home, or in cases where you have an AirBnB or a home office on your primary residence. Ensure that your service provider confirms the status of your property qualification before starting an exchange.

Rules of the Exchange Procedure

To start the process, you need to open exchange with a qualified intermediary, after which you can list the property for sale. Once the property has been put up for sale, then you can start the search for a replacement property that you’ll exchange with. Note that your intermediary will hold the proceeds of the sale of your home, as they wait for the purchase process to complete.

1031 Identification Period

1031 requires you to correctly document a property that you’ll be purchasing in your exchange. Here, two rules must be adhered to. First, you’re required to identify a replacement property within 45 days of selling your property. Secondly, you must close on the identification property in 180 days in total. This poses a risk as a sale deal might fail after the first 45 days, forcing you to either pay taxes on your gain or end up with a raw deal.

The overall cost of a 1031 exchange on your property highly depends on your intermediary of choice. But the key element is to ensure that the intermediary that you choose is well qualified an experienced to handle the exchange to the end.