Q: Could you explain the rules concerning an IRC 1031 tax-free exchange? I'm especially interested in the time requirements for identifying and settling on the replacement of like-kind property used in the exchange.
A: An Internal Revenue Code Section 1031 exchange is a legal capital gains tax-deferral technique, which can be used to defer or avoid the capital-gains tax due on the sale of your investment (not residential) real estate -- provided that you invest in another investment property and follow IRS guidelines on using an intermediary or facilitator.
Remember, there really is no "exchange" in the sense of a trade or barter.
What really occurs is a tax-deferred rollover of equity from the investor's former investment property to his or her subsequently acquired investment property.
There is a "like-kind" requirement, but there are many alternatives to choose from.
Just about any type of investment real estate would qualify. You can exchange -- that is, roll over -- to and from any type of investment property in any location within the United States. For example, seashore rentals, shopping centers, land, rental houses and condos, apartment buildings, motels, retail stores, trailer parks, parking lots and storage facilities would all qualify for a 1031 exchange.
The settlements of the relinquished and the replacement properties do not have to be simultaneous. There are two time limits, both of which run concurrently from the settlement of the relinquished property.
* You have 45 days from the date of the first settlement to "identify" the like-kind property;
* You have 180 days from the date of the first settlement to settle on the replacement property.
There are no extensions, so many savvy 1031 investors search for and locate the replacement property before they close on the relinquished property.
Under IRS requirements, you must use an intermediary or facilitator.
This intermediary must act as an escrow agent holding the funds from the settlement of the relinquished property until the settlement of the replacement property.
The cost for handling one of these 1031 exchanges should run anywhere from $900 to $2,500.
Call a real estate attorney for more information.