Maui 1031 Exchange tax deferred treatment of capital gains

Flo Bahr
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What is a 1031 Exchange?

What is a 1031 Exchange and how can I benefit from it?

The 1031 Exchange tax deferred treatment of capital gains is one of the best real estate investor choices for building real estate wealth. This provision of the Internal Revenue Code allows property owners to exchange their property for other like-kind property without payment of capital gains at the time of sale of the property. The buyer of your Relinquished Property and the seller of the Replacement Property do not need to get involved in your exchange.

You Must Follow the Rules

Rule #1- The properties exchanged must qualify, and be of "like-kind". Some qualified properties are those held for business use (rental property) or land held for investment. They must be located in the 50 United States or the U.S. Virgin Islands. Personal property and second homes that are not rented out do not qualify.

Rule #2- There must be an actual exchange. If you simply sell your property and reinvest the money in another property, you will not qualify for exchange treatment, even though it is a simultaneous close. You cannot receive the cash proceeds from the sale of your property. You must have a written contractual agreement with a Qualified Intermediary. The intermediary must hold the money until you buy the replacement property and the time limitations below must be adhered to.

Rule #3- Two time limitation periods have to be strictly followed. One limitation requires Replacement Property to be identified within 45 days of the date you transfer the first property. Property is identified only if it is designated as Replacement Property in a written document signed by you and delivered to the Intermediary within the 45 day period. You may identify more than one property as Replacement Property subject to rules. Ask your intermediary to explain these.
The second time limitation requires Replacement Property to be transferred to the exchanger within 180 days.

Rule #4- A Qualified Intermediary must handle your exchange transaction. The intermediary serves as your agent to handle your exchange and has specific functions.

All proceeds from the Relinquished Property sale need to be invested in the Replacement Property. If not, you will have to pay tax on the proceeds you keep and, perhaps, on the difference between the old and new mortgage if the new one is lower.

*Because tax laws, regulations and rules change and mistakes occur, this information should not substitute for legal advice. Please consult a professional tax advisor for advice before making a decision to do a tax free exchange.

More info on 1031 exchange.

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