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TYPES OF 1031 EXCHANGES:1.
Straight-forward Exchanges. This is where
the taxpayers SELLS their real property BEFORE
they BUY their replacement property(ies).
2. Improvement Exchanges. This is where
the taxpayer purchases raw land (or property
in need of repair) and then desires to use
some of their excess funds from the first
sale to BUILD IMPROVEMENTS. For example,
a taxpayer sells a rental duplex and buys
a raw piece of land and wants to build a
storage building on the property.
3. Reverse Exchange. This is the newest
area of the 1031 Exchanges. In October of
2000, the IRS carved out a safeharbor provision that
safely allows taxpayers to BUY their replacement
property BEFORE they SELL the property they
want to liquidate.
TIME LIMITS
The following time limits are measured
from the CLOSING DATE of the first parcel
of real estate the taxpayer is selling
in their 1031 exchange.
IDENTIFICAITON PERIOD
The taxpayer has 45 calendar days to “identify”
(the IRS has a specific ways this has
to happen) the property the taxpayer MAY
want to purchase. The rules are simpler
if the taxpayer only identifies up to
3 properties, but more properties can
be identified. Just because a taxpayer
identifies a property does NOT necessarily
mean the taxpayer is obligated to purchase
said property.
EXCHANGE PERIOD
The taxpayer has 180 calendar
days to actually take title to the real
estate they are going to acquire in the
exchange. Note that the exchange period
and the identification period run simultaneous
to each other.
LIKE-KIND REAL ESTATE.
The tax code requires the taxpayer to
acquire “like kind” real estate
when doing a 1031 exchange. This requirement
is not as limiting as it sounds. This
does NOT mean if a taxpayer has a rental
duplex and they sell it they have to buy
another duplex. The requirement is only
that the property be in the United States
(and a few territories) and be property
that is “held for investment or
used in a trade or business.” There
are issues surrounding personal residences,
acreage in a family farm, vacation homes,
and real estate that is deemed to be “inventory.”
For 1031 Exchange questions email us today
at
rirwin@midwest1031.com.
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