Section 1031 is an excellent tax-deferral strategy, but it can be confusing to taxpayers who have never used it before. Below are a handful of the most frequently asked questions we hear about 1031 exchanges in Duluth. If you have more questions about your 1031 exchange, contact our Duluth qualified intermediaries at 218.831.1031.
What is a 1031 Exchange?
In the simplest terms, a 1031 exchange is a tax-saving strategy laid out in the Treasury Regulations that allows you to defer the capital gains taxes on the sales of property and roll those net proceeds into bigger and better property. This allows you to avoid a big tax windfall and keep your money compounding and building interest over time.
Can Anyone Do a 1031 Exchange?
Yes, any taxpaying American citizen can do a 1031 exchange, so long as the relinquished property and the replacement property are both located within the United States. 1031 exchanges are for big time real estate investors and regular taxpayers alike.
How Do I Know if My Property is Like-Kind?
One of the most important requirements in a 1031 exchange is that your relinquished property and your replacement property need to be like-kind. When it comes to real estate, like-kind is very broad. Most real estate is like-kind to most other real estate. For example, an apartment complex and a hotel would be considered like-kind because they are both real estate. When you get into the world of personal property (or chattel), the water gets a little murkier and you have to be more careful about what you’re exchanging into. A fleet of trucks used in your business can be exchanged for another fleet of trucks, but you could not 1031 exchange that fleet of trucks for an airplane.
What are the Time Frames I Need to Be Aware of in a 1031 Exchange?
The two essential time frames you need to be aware of in a 1031 exchange are 45 days and 180 days. After you sell your relinquished property, you have the next 45 days to identify your new replacement property. You also have 180 days total to complete your exchange (with both clocks running concurrently). For help determining your 45 / 180 day time periods, use our calculator.