1031 in a nutshell

[Tom Tippmann]

Hey BP, Could someone give me a run down of how 1031 exchanges work? I understand that the benefit is you do not have to pay capital gains tax, but how does it work exactly? Any feedback would be great. Thanks, Tom

[Dave Foster]

Big topic for a little nutshell. Best thing is to determine where you want to go and then make 1031 fit into it for you rather than adjust your business model and goals to accommodate 1031. But bottom line is that by following a few guidelines you can sell investment real estate that would ordinarily trigger a tax and instead buy new investment real estate and by following those guidelines you do not have to pay the tax.  It is deferred into the new property where it stays until you sell or you can sell doing a 1031 exchange and defer again, or you can die and will it to your heirs who get it with no gain, or you can convert it into your primary residence and eliminate a portion of the gain or or or....

Summary of the guidelines

1.  The order is sell then buy.  And any kind of investment real estate may be purchased to replace any other kind of investment real estate

2. You must use a qualified intermediary and they must be in place prior to the sale of the old property.  You may not touch the proceeds in between sale and purchase.

3.  You have 45 days after sale to identify your potential replacements. The entire process must be done within 180 days of close of sale.

4. The tax payer for the old property must be the same as the tax payer for the new property.

5. In order to defer all tax you must purchase at least as much (dollar amount not number of properties) as you sell (net sale after closing costs but before mortgage pay off) and you must use all of the proceeds in the next purchase or purchases.

Lot's of google resources.  Lots of us have good primers on our web sites.  BP has a primer somewhere also on this site.  Maybe someone can point you to it.

Holler any time.