1031 Essentials
Like any other business transactions, certain guidelines must be satisfied and met so as to have an Exchange with no, or very little, hassles.
- Properties in an Exchange
In the true essence of the transaction, there should be AT LEAST one (1) property being sold, and one (1) that serves as a replacement for the former
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- Properties that Qualify for an Exchange
Any property held and used for trade, business or investment. More specifically, properties should be of “like-kind”. For example, real properties located in the U.S. falls under the “like-kind” requirement.
- Properties that DOES NOT Qualify for an Exchange
Any property considered to be for your own personal use (i.e. principal place of residence) DOES NOT qualify to be used for a 1031 Exchange.
- Tax-deferred properties
In order to fully avail of capital gains tax, the value of the replacement property must be equal to or greater than the property being sold. Furthermore, all earnings from the sale of the sold property MUST be used to purchase the replacement property.
- The use of a Q.I. (Qualified Intermediary)
A Qualified Intermediary is also known as Accommodator. These are legal, totally independent entities that facilitate the transaction of the Exchange, selling the relinquished property and buying the replacement property. It is to be noted though that their actions is based solely on the properties decided upon by the client. Furthermore, they provide necessary guidance and assistance in the whole transaction, including document preparation. It must be kept in mind that said entities CAN NOT provide tax, legal and/or financial advice to its client.
- Time restrictions
Last but not least of the guidelines is the time observance. Typically, a client has 45-days given to him, from the time the relinquished property is closed, to name his replacement property. A full 180-day is given for the whole transaction to end. If, for one reason or another, the transaction is not done within the said time limits, the exchange will fall through. As a result the client is liable for any tax incurred in the buying and selling of the properties after the lime limit.
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