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To fully defer all capital gains taxes, all 1031 tax free exchanges must meet four separate requirements:

  • First, 100% of all proceeds from the sale of the first property must be reinvested into the second, replacement property.

  • Second, the amount of equity ( property value minus loan value) of the replacement property must be equal to or greater than that of the relinquished property.

  • Third 1031 Tax Free Exchange Requirement: By law, you must use an independent third party, called a Qualified Intermediary, to hold the proceeds of the sale. The Qualified Intermediary also will prepare the legal documents required to link together, as a qualified exchange, the sale of the old property and the purchase of the new property.

  • Fourth 1031 Tax Free Exchange Requirement: exchanged properties must be like kind. For a property exchange this means real-property for real-property, but not necessarily land for land or a rental house for another rental house.

    It is often difficult in the short 45-day time frame to locate a property that has the right purchase price, debt ratio, and closing schedule to meet the 1031 Tax Free Exchange Requirements-and then arrange any financing that may be necessary. Because there is a steady supply of tenants in common properties available they are an ideal solution for exchangers seeking management free tax free exchange properties with steady income.
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