A 1031 exchange property deal involves a person changing an asset, or property, for another asset, or property; or as the Internal Revenue Service calls it, a “like kind” exchange, no matter whether it is in an office, industrial, retail or residential sector. One reason why people take advantage of this is that when the real estate market is in a rapid appreciation, the sale of a property can result in large capital gains and the 1031 tax free exchange acts as a tax deferment. Although there are still some complicated aspects to the rules of an exchange, the Internal Revenue Service has simplified them.
At times there is some confusion as to what qualifies as a “like kind” type of property for a tax deferred 1031 exchange. Some examples of qualifying properties include duplexes, apartments, single family rentals, raw lands and commercial properties. For instance, you can exchange a single family rental for raw land or a commercial building or even apartments and they can be exchanged anywhere in the United States.
Many owners or investors are unaware that in order to be approved for a 1031 tax free exchange the sale of the old property and the purchase of the new property do not have to be completed simultaneously. As a matter of fact, most of the time the 1031 is actually a delayed exchange, making full use of the 180 days that is allowed from the sale of the old property to the acquisition of the new property. The one stipulation is that the intended replacement property must be identified within 45 days of the closing of the sold property.
The 1031 rules are applicable whenever you intend to sell a property that is not your primary residence (and follows the like kind rule), and you plan to purchase a property within 180 days after you close on the sold property.
One feature that many people find useful in a 1031 tax free exchange is that while you may want to consider a separate exchange for each of the properties sold it is allowable to exchange any number of 1031 properties that you desire in the same exchange.