To fully defer all capital gains taxes, all 1031 tax exchanges must meet four separate requirements:

  • First, 100% of all proceeds from the sale of the first investment property must be reinvested into the second, replacement investment property.

  • Second, the amount of equity ( investment property value minus loan value) of the replacement investment property must be equal to or greater than that of the relinquished investment property.

  • Third 1031 Tax Exchange Requirement: By law, you must use an independent third party, called a Qualified Intermediary, to hold the proceeds of the sale. The Qualified Intermediary also will prepare the legal documents required to link together, as a qualified exchange, the sale of the old investment property and the purchase of the new investment property.

  • Fourth 1031 Tax Exchange Requirement: exchanged investment properties must be like kind. For an investment property exchange this means real-investment property for real-investment property, but not necessarily land for land or a rental house for another rental house.

    It is often difficult in the short 45-day time frame to locate an investment property that has the right purchase price, debt ratio, and closing schedule to meet the 1031 Tax Exchange Requirements-and then arrange any financing that may be necessary. Because there is a steady supply of tenants in common investment properties available they are an ideal solution for exchangers seeking management free 1031 tax exchange properties with steady income.

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