A tax-deferred exchange, or a 1031 exchange, allows an investor to defer capital gains tax on properties that are not bought and sold but exchanged. The exchange type gets its name from the Internal Revenue Code Section 1031 that allows this transfer of properties used in trade, business, or investment.
The key in a 1031 exchange is that the taxpayer must never receive monetary gains from the purchased property, referred to as the “Replacement Property.” Instead, they exchange their “Relinquished Property” for the Replacement in the sale. And both properties must be purposed for professional trade, business, or investment.
Often, this exchange involves an intermediary if the transactions cannot be made simultaneously. The intermediary holds the money an owner receives for a Relinquished Property until such time as the Replacement Property can be purchased with it.
In some cases, a property owner may be able to acquire the Replacement Property before they are able to sell their Relinquished Property. These are referred to as reverse exchange transactions, and also utilize an intermediary. An Exchange Accommodation Titleholder will hold onto the title of the Replacement Property until the Relinquished Property is sold.
Although the majority of matters concern 1031 exchanges, we regularly advise clients on issues including:
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