1031 Property Exchanges

By performing a 1031 exchange when you sell an investment property and use the proceeds to buy another, you can defer the payment of capital gains tax on any gain.

There are several different types of 1031 exchange that can be performed depending upon the timings of the sale and purchase.

• The most straightforward type of exchange is where both closings (the sale and the purchase) are performed on the same day. This is called a Simultaneous Exchange.
• Another type of exchange that can be performed is where the new property closes after the sale. This is called a Delayed Exchange. The government defines the rules under which this type of transaction can take place and it must follow strict time-lines
• When the closing of the old property (the one sold) occurs after the new property (the one purchased) this is called a Reverse Exchange. This type of exchange is facilitated by a third party who is assigned the title of the new property until such time that the old one is sold.
• The final type of exchange is performed when the owner of the new property wants to perform improvements before completing the exchange. This is usually done in situations when the new property is valued less than the old and the owner wants to raise its value so that they don't pay capital gains tax on the difference in prices.

1031 exchanges cannot always be used for investment properties, there are certain restrictions. Certain types of property cannot be exchanged, for example, it the property of a fix and flip, if the property is purchased for resale or if it is you personal residence.

There are also restrictions regarding who is on the title for the properties. The people who are on the title of the original investment property must also be on the title for the new property. New people can be added, but no one can be removed.

We advise you to consult a real estate tax specialist before undertaking any real estate transaction based on a 1031 exchange.

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