A 1031 exchange, also known as a like-kind exchange, allows a taxpayer to defer capital gains taxes by exchanging one investment property for another. Texas follows the same federal rules for 1031 exchanges as the rest of the United States. Here are some of the important rules to keep in mind:
- Property Type: Only real property held for investment or use in a trade or business qualifies for a 1031 exchange. Personal use property, such as a primary residence or vacation home, does not qualify.
- Time Limitations: There are strict timelines that must be followed in a 1031 exchange. The taxpayer has 45 days from the sale of the relinquished property to identify potential replacement properties and 180 days from the sale to complete the exchange.
- Qualified Intermediary: A qualified intermediary (QI) must be used to facilitate the exchange. The QI holds the proceeds from the sale of the relinquished property and uses them to purchase the replacement property.
- Value of Replacement Property: The value of the replacement property must be equal to or greater than the value of the relinquished property in order to avoid paying taxes on the difference.
- Reporting: The exchange must be reported on the taxpayer’s tax return for the year in which the exchange occurred. The IRS requires specific forms to be filed to report the exchange.
It is important to consult with a qualified tax professional or attorney to ensure that all rules and regulations are followed in a 1031 exchange. If you need a Qualified intermediary to consult with, let me know and I will put you in touch with one.