If you are in the business of buying and selling real estate for investment purposes, you will likely hear about the advantages of a “1031” or “like-kind” exchange at some point.
A like-kind exchange, often called a 1031 exchange, is swapping one piece of real estate for another. The purpose is to defer capital gains taxes that are typically assessed when a property is sold.
Requirements for a like-kind exchange
However, there are several requirements you must meet to qualify for a 1031 exchange. The properties you are exchanging must be considered similar or “like-kind” properties by the Internal Revenue Service.
This rule is applied broadly. You do not necessarily need to swap one property for another property of the exact type. For example, you could likely swap a piece of land for a building.
You cannot receive any proceeds from the sale of the original property at any point in the process. The sale proceeds must go directly into an escrow account, where they are held until they are used to purchase the new property.
Deadlines that must be met
Timeframes are another requirement you must be aware of. You might not know exactly which new property you wish to purchase when you sell the first property.
In that case, the proceeds from the initial sale go into escrow. You then have 45 days to submit in writing the proposed new property you wish to purchase to the person holding the funds in escrow.
The second deadline involves the closing date of the new property. You must close on the new property within 180 days of the sale of the old property.
Can I use my home for a like-kind exchange?
Since 1031 exchanges are meant for investment properties, your home or principal residence usually will not qualify for a like-kind exchange, since you live in it rather than own it for investment purposes.
If you want to use the property you purchased as your principal residence, you might be able to do that. You normally cannot move in right away and must rent the property out for a certain amount of time to receive the 1031 tax break before you can move in.
