Selling Your Property - The 1031 Exchange, Part III

By Jerry Stewart

Today is the last of my six reports on this matter of selling investment real property and if the 1031 Like Kind Exchange can work for you. And, if you’re considering doing a 1031 exchange with your property sale, know these key points.

1. The 1031 exchange can only work for like-kind properties. That is, real property for real property. And you replacement property cannot be a personal residence.
2. Realize that there is a strict time limit involved. Within 45 days of selling your first property, the second replacement property must be chosen. And, most important, the replacement property must be purchased within 180 days of the sale of that first property. Any purchases after that 180 day period will be disallowed.
3. The second replacement property must cost at least as much as the sold property. If the replacement property cost less than the first property sale price, that difference will be taxable to you not to exceed the first property’s profit. And one other important point regarding cash. After property one is sold, all cash proceeds from that sale must be put into the purchase of the new property. Any cash held back and kept will be taxed.
4. Remember, you must have a professional facilitator to handle this buy/sell exchange. Without every point of the transaction handled just right, the 1031 exchange will not work.
5. This brings me to my final point, which is the big question – Is the 1031 exchange right for you? You say, "Sure it is. Anything that can keep the tax man’s hand out of my pocket is a good thing." Now, that is usually a wise statement, but remember this, the 1031 exchange is not a tax-free event. It’s a tax-deferred event. You’re not avoiding the tax. You are only postponing it until a later date.

Know this, today our capital gains rates, thanks to George Bush and our Republican controlled Congress, are the lowest they have been since before World War II. But, they can be changed and go up – way up! So, postponing the tax at today’s lower rate and paying later at a possibly higher rate may not be the best thing to do. I told you it was tricky.