1031 Properties: What Is Eligible And What Is Not
With the use of Section 1031 of the Internal Revenue Code, an investor is allowed to sell, or exchange as the transaction is referred to in the code language, properties without the penalty of having to pay capital gains taxes. These Section 1031 exchanges allow for the deferral of the payment of capital gains taxes on qualifying 1031 properties. This frees the investor to reinvest his money in what is referred to as link-kind properties. This encourages more investment in real estate, making it easier for an investor to upgrade and diversify his holdings without penalties. In order for properties to quality as like-kind properties according to the regulations of Section 1031, the properties must meet the following requirements: they must be properties used in a commercial manner or as investments, they must not be personal-use properties such as vacation or family homes, and they must be located in the United States as properties in foreign countries are not viewed as eligible 1031 properties under the stipulations of the code because they are not considered like-kind.
In order to exchange 1031 properties under Section 1031, an investor must follow the requirements. Of course, the Internal Revenue Code is a very complex document, and requires interpretation and implementation by trained professionals in the field of real estate law, but a few basic rules can be pointed out that must be followed whenever 1031 properties are exchanged. Once property has been chosen for the exchange, the investor must hire a qualified intermediary. This person will take care of most, if not all, of the procedures involved in the transaction. He will receive and bank in a separate account the proceeds of the sale, which he will later forward to the seller of the property being received in exchange. The qualified intermediary will ensure that all papers and documents for the transaction are in order, and that the properties selected qualify as 1031 properties.
The investor must notify the qualified intermediary of his choice in replacement 1031 properties or property within 45 days. There is no limit as to how many properties he can require, as long as the full price of his original property is used toward the new exchange. The new property must be classified as like-kind as well, or else it cannot be used in the exchange. The entire transaction must be completed within 180 days or the tax savings from the Section 1031 properties will be forfeit. These time stipulations must be strictly adhered too, as there are rarely any extensions approved unless the circumstances are strenuous. The properties that can be invested are extremely varied. Investors may invest vacant land with possible commercial use, or any sort of real estate comprising of buildings that are used in commercial enterprises or that were purchased strictly for the purpose of future investment. Personal land or residences cannot be used as 1031 properties, neither as the exchanged properties or the properties bought with the exchange, as these properties have no commercial zoning and cannot be used in commercial enterprises without variances.
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