1031 exchange is the swap of an investment property for another. The 1031 exchange rules for 2020 and beyond can be read in this article. This helps investors defer the capital gains tax on the sale of the new property. There is even a common term used by investors to 1031 a building for another.
This is a quite simple process that doesn’t require much but certainly, the rules should be known by both parties.
1031 Exchange Deadlines
As soon as the old propety is sold, the replacement property must be bought by the qualified intermediary. This is also known as the middleman. A 1031 exchange can’t be done by a person. Instead, the money gained by the sale of the old property must be kept by the qualified intermediary and it will then be used to purchase the new property.
However, there is one thing that needs to be known about the amount gained from the sale of the old property. Although a 1031 exchange can only be done with like-kind properties, the price of both properties may not be exact. If that’s the case, the amount leftover from the sale of the old property will be taxed as capital gains.
Delayed 1031 Exchanges
Sometimes, a 1031 exchange doesn’t happen right away. If there is a delay, the IRS allows up to 180 days. Before the 180 days the initial 45 day, the 1031 exchange rule begins. In the first 45 days after the sale occurs, you must designate replacement property in writing to the intermediary.
It’s possible to designate up to three replacement properties as long as you close on one of them. It’s also possible to designate more than three if the valuation tests deem the properties as like-kind. So, what matters is not the number of replacement properties but the overall value.
As mentioned, the most important deadline is after 180 days. You must close on the new property within 180 days of the sale of the old property. Both of these deadlines run concurrently. So, after the 45 days, you will have 135 days to close on the property.
Extra Money from Sale
In addition to these timing rules, if there is leftover cash from the purchase of the replacement property, you will be subject to taxes. This also applies to mortgages if you have on the old property.
For example, if the sale of the old property was for $400,000 and you bought replaced the new property for $385,000, you will be taxed on that remaining $15,000. It’s always the best to find like-kind properties that you will swap for dollar-to-dollar whether you include the qualified intermediary fees or not.