How to Defer Taxes on a Property Sale Through a 1031 Exchange

Property Tax Written on NotebookThe Internal Revenue Service (IRS) can be your friend if you’re a small investor, and Section 1031 is a good example. Under it, you can delay paying taxes when selling a property if you use the money to buy a like-kind exchange.

However, as 1031 Exchange Place reminds, you have to follow some strict rules to do it successfully. The best way is to look for 1031 exchange properties for sale. Here’s what you need to know:

Defining like-kind

The rules of Section 1031 exchange state that you can delay paying capital gains tax if you spend the money from selling a property on a like-kind property. This means the old property and the new property are both for business or investment use.

For example, you can sell an apartment you rent out and buy a condominium to rent out. You cannot sell the home you live in, buy another home to live in, and expect to do a 1031 exchange. A like-kind exchange does not have to be the same in value. However, if you have any money left over after buying the replacement property, you have to pay tax on the extra cash.

Time limits

The tricky part with a 1031 exchange is the timing. The best way to do it is to swap like-kind properties. That’s not always possible, however. In most cases, you sell a property first before finding and buying a replacement property. You only have 45 days after the sale of your property to find a replacement property.

In some cases, you already have a replacement property in mind before selling the property. In either case, you only have 180 days to finalize the exchange. If you do not meet these deadlines, you will not qualify for a 1031 exchange.

Cash handling

You cannot receive or hold the money from selling your property at any time. This is important if you want to qualify for a 1031 exchange. You need a qualified go-between to hold the money until you complete the exchange. You cannot ask your agent, broker, attorney, or anyone else who has worked with you in the last 24 months to do that for you. The best go-between for this purpose is an established exchange service.

A key element of deferring taxes on your property sale is finding the right replacement property within the time limits. Your exchange service may be able to help you find 1031 exchange properties for sale.