If you sell a piece of investment property, you will often be required to pay tax on it, as well. In situations in which a person then uses these gains to buy another piece of investment property, that person will likely be taxed a second time. Section 1031 of the tax code offers an investor the option to only pay taxes once on certain types of investment properties. Because Section 1031 can be particularly advantageous for investors, it is important for investors to understand how this section of the tax code operates.
Requirement # 1: Qualified Intermediary
To qualify for Section 1031 protection, a transaction must use a qualified intermediary who must be assigned into the related Purchase and Sales Agreement or other associated contract. A qualified intermediary is an individual who makes sure that a property transaction is correctly structured and valid. If a person fails to use a qualified intermediary in such a way, the transaction will fail to qualify for Section 1031 protection.
Requirement # 2: Replacement Property
There are specific requirements about what type of property can be used as replacement property in Section 1031 exchanges. This property must be equal or greater than the net sale value of the property that is sold. Section 1031 exchanges, however, are not “one for one” swaps, which means that a person can sell multiple properties and use a single property as the replacement. Additionally, the property must have a qualifying use, which means that it must be an investment property, a rental property, or used in the course of the owner’s business or trade. For example, a person would not be able to exchange a primary residence for another primary residence and still qualify for Section 1031 protection. If both the first and second properties meet the qualifying use, however, they are not required to be used in the same way.
Requirement # 3: Transaction
To qualify for Section 1031 protection, a transaction can take several forms, but must satisfy several elements. An investor has only 45 days from the close of the first property to locate potential replacement properties. An investor also has a window of 135 calendar days in which to perform the exchange or the investor will be barred from Section 1031 protection. Investors often must also identify not just one but three potential properties to purchase, which provides the investor with alternatives in case complications arise. In addition to these rules, there are many other requirements that apply in certain Section 1031 cases.
Speak with an Experienced Real Estate Lawyer
There are numerous complicated laws involved with the purchase and sale of investment properties, including Section 1031. Despite these complexities, Section 1031 offers some substantial advantages. At Adam Law Group, we understand how to best handle real estate transaction and can provide seasoned legal assistance to navigate this process. Contact our law office today by calling (904) 329-7249 to schedule an initial consultation during which time we can determine whether a Section 103 exchange is right for you.