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In order to successfully avoid all the tax when doing 1031 tax deferred exchanges, be sure to follow these guidelines. If you do not meet one or more of these guidelines you will owe some or all of the tax on the transaction. Your qualified intermediary will help remind you about these guidelines during your transaction.
- Meet all Deadlines
You have 45 days to identify replacement property(ies) and 180 days to complete all tax deferred real estate transactions. See the timeline for more details.
- Properly Identify Replacement Property (ies)
There are IRS guidelines detailing how to properly identify your replacement property within the 45 day period. See "Identifying Property" for the 3 rules of property identification.
- Buy Equal or Up
To avoid all the tax, you can't end up with any cash in your pocket. Consequently, you need to purchase a replacement property that is at least equal to (or greater than) the value of the property you are selling.
- Spend All the Cash
Because you will be taxed if you take any cash out during the exchange transaction, you must re-invest all the cash received from the sale of the old property into the new property. If you need access to cash, you may wish to refinance the new property to pull cash out after the exchange period is over.
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