A tax deferred exchange is simply a method by which a property owner trades one property for another without having to pay federaltaxes on the transaction. In an ordinary sale transaction, the property owner is taxed on any gain realized by the sale of the property. But in an exchange, the tax on the transaction is deferred until some time in the future, usually when the newly acquired property is sold.
These exchanges are sometimes called "tax free sxchanges" because the exchange transaction itself is not taxed at that time.
Tax deferred exchanges are authorized by Section 1031 of the Internal Revenue Code. The requirements ofSection 1031 and other sections must be carefully met, but when an exchange is done properly, the tax on the transaction may be deferred.
Some Exchange Rules
1. "The Golden Rule" - You must exchange for a property of equal or higher value and, in your replacement property, you must have equal or higher equity. If your replacement property costs less or you have less equity in it, at least a portion of your capital gain will besubject to tax.
2. Use of Property - Both the property you convey and the property you receive in exchange must be business or investment properties. Remember, you cannot complete a 1031 Tax Deferred Exchange if either property is or will be a primary or secondary home.
You may rent your investment property to a family member only if it is their primary residence and they pay fair-market rent.
"LIKE USE" OF PROPERTIES IS NOT REQUIRED TO COMPLETE AN EXCHANGE. You can exchange a vacant lot for a single family home or a single family home for a condominium unit.
Properties with mixed uses may be partially exchanged; these require detailed analysis.
3. Multiple Properties - You may make an exchange of multiple properties. YOu may convey one and acquire more than one. You may convey more than one and receive only one in exchange.
4. Identification of Replacement Property - You must identify your replacement property within 45 days of the settlement of your exchange property. Replacement property should be indentified by lot and block or street address.
Remember, you may identify up to three replacement properties without regard to value. We recommend that you identify three. If you identify only one and cannot acquire it, your ability to exchange is eliminated.
You may also re-identify replacement property and re-submit an identification form. However, all re-identifications and re-submissions must be made within 45 days of the conveyance of the exchange property.
5. Receipt of Replacement Property - You must take title to your replacement property within 180 days of the date on which the exchange property was conveyed, or by the date on which yout tax return is due, whichever first occurs. If your tax return is due within that 180 days and you have not received your replacement property, seek an extension to your tax return filing date.
For further information contact Realtex (609) 263-2231
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