Often we represent a buyer or a seller of Charlottesville real estate who opts to utilize the rules of an IRS 1031 Tax Deferred Property Exchange in addition to their traditional Buy or Sell agreement. The intent is the same as with any other real estate transaction: one party sells and another party buys.
But in the case of a 1031 Exchange, a party may choose to “exchange” or swap business or investment property for other similar real estate, thus no taxes apply to that party’s portion of the transaction. The 1031 exchange applies to a taxpayer who sells and is the same taxpayer who buys. To be eligible for Section 1031 of the IRS Code, the properties exchanged must be held for productive use in a trade or business or for investment, and they must be of “like kind”, as in, of the same nature or character, even if they differ in grade or quality. You can see why a 1031 tax exchange is also called a “Like Kind” Exchange regarding properties that are of the same kind.
The concept is fairly straightforward but the rules of a 1031 Exchange are quite explicit and can be complicated. For one example, a party may choose to swap his existing qualified farm by exchanging it for a similarly valued qualified farm. That person could also exchange his existing qualified property for more than one new qualified property, so long as the total values of the buyer’s buy/sell properties meet the IRS rules.
If you are selling your own property to a buyer who has declared that they intend to utilize a 1031 tax deferment, it may not affect your money from the transaction at all. But you will need to abide by the same strict time frame and deadline rules that your buyer agreed to obey. The 1031 property exchanger has 45 days from the date they sell until they identify or name their specific new properties for purchase/exchange. They then have 180 days from the sold date of their original property during which they must complete the purchase of their new property. Both buyer and seller must adhere to this strict 180-day limit in order to complete the transaction.
The most important ingredient for someone who chooses a 1031 Exchange, is to select a qualified Intermediary to manage the process and handle the money. That is very important because at no time can the proceeds from sale be handled by the 1031 taxpayer exchanger party. Instead all monies are handled by the qualified intermediary. We can help guide you to intermediaries in Central Virginia who are bonded and qualified to manage your own 1031 tax deferred exchange of property.
As realtors we do not give tax advice nor legal advice, and of course every situation is different. But you can learn more about 1031 Exchanges and whether they can help you at the IRS 1031 Tax Exchange explanations of rules in this link. It will benefit all parties if the Realtors who are involved have experience handling 1031 Exchange sales, so of course we’re always glad to discuss this with you more.