Definition of 1031 Exchange

1031 Exchanges allow investors in real estate to defer the capital gains tax when exchanging "like-kind" property. The investor must exchange for real estate of equal or more value and needs to follow a number of rules & guidelines.

1031 Exchange Requirements

- To perform a 1031 Exchange, it is nessesary to use a qualified intermediary. The exchanger must transfer right, title & interest to the qualified intermediary the moment the transaction is closed in escrow.

- All documents must be prepared & signed prior to the escrow closing.

- After the closing of sale in escrow, the qualified intermediary is required to place all funds into an interest bearing account.

- At this point, the exchanger has 45 days to identify a suitable replacement property. Identification of replacement property is satisfied by mutual acceptance & execution of a purchase & sale agreement between a seller & the exchanger.

- The qualified intermediary forwards all funds including the accrued interest to the escrow at closing to complete the transaction.

The Flexability of 1031 Exchange

A 1031 exchange can be performed within one state or between different states. This allows great flexibility with ones investment in rental property. Suppose one owned 4 rental properties in a depressed real estate market. That individual could sell the 4 rental properties & use the proceeds as a down payment towards a small apartment building in a hot real estate market. This process would allow the investor to increase their leverage & potential for increased appreciation over the years to come.