1031 Exchange
Defer your capital gain by doing a 1031 exchange on your investment properties is the right choice if you decide to purchase another investment property after the sale.
45-Day Rule
The 45-Day Identification Rule
When you intent to do a 1031 exchange, one of the most critical rule to follow is the 45-Day identification rule. It requires you to identify your potential replacement properties within the 45 days after the closing of the sale of the property. To avoid failing this rule, we suggest starting the research before you close your sale on the relinquished property.
Within the 45 days, you should be able to either produce a written list of replacement properties or take title of the new property in order to meet this requirement.
180-Day Rule
The 180-Day Closing Rule
Besides the 45-Day rule, the 180-Day rule is also required to complete the 1031 exchange. To qualify, you must close the replacement property and complete the transaction within 180 days after the sale of the relinquished property.
Keep in mind that both the 45-day and 180-day rule applies right after the sale of the old property and run concurrently. Ensure you have a good planning before you start a 1031 exchange. You would also want to have a qualified intermediary to hold the cash between the transactions.
Tax Forms
Attached form 8824 to your individual 1040 tax forms.
There are many more rules when it comes to 1031 exchange. The 45-day and 180-day rules are just the basic concepts that you want to understand before diving into a 1031 exchange.
For disclosure and reporting purposes, you would report this on form 8824. Failure to report this will invalidate your exchange and trigger capital gains tax and depreciation recapture along with potential penalties and interests. Therefore, ensure you discuss with your tax professional before and after you complete your 1031 exchange to avoid any issues.
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If you are interested in learning more about 1031 exchange, or had completed a 1031 exchange during the year, send us a message or make an appointment today with us to go over your situation!
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