What is a Real Estate Exchange?
A real estate exchange is a process in which real estate changes hands in a way that is not subject to capital gains taxes. This is a very profitable way in which to exchange income. However, it is important to understand that there are some strict rules associated with a real estate exchange.
Some transactions aren’t covered by the rules of a real estate exchange. So, you may want to talk to a tax attorney before you engage in a real estate exchange. One of the main rules that you should know about is that any private property that is held for personnel use cannot be exchanged under this provision.
A 1031 real estate exchange only applies to those properties that are deemed investment opportunities or commercial endeavors. This provision doesn’t apply to cases where property is sold and another one purchased. Only the exchange of like-kind property is involved in a real estate exchange. The basic premise of like-kind property is that it must be an investment property. For instance, you could exchange an apartment complex for a shopping mall or a shopping mall for undeveloped real estate. Money cannot be exchanged here without being subjected to taxes.
There are also other rules that apply to a real estate exchange. One of these rules is the fact that once one of the properties is transferred, then the other property must be transferred within 180 days. A replacement property has to be identified within 45 days. If you don’t meet these time provisions the entire exchange could be subject to capital gains taxes. Unfortunately, the IRS (Internal Revenue Service) doesn’t make any exceptions whenever it comes to this rule.
A real estate exchange is when an investor is allowed to sell one property and reinvest all of the equity they receive from the sale into another property without recognizing any of the gain from the sale. This means that if an investor sells a property and then turns around and purchases another property with all of those earnings, they can defer the tax owed from the original sale.
