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What are some tips for making a 1031 exchange?

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Quick Answer

Tips for a 1031 like-kind exchange involve using only for investment or business property, performing a delayed exchange, designating replacement property, and closing within six months, reports the Forbes website. The Internal Revenue Code section 1031 provides more information on the terms of an exchange.

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Full Answer

Investors cannot swap a primary residence for another home, notes the Forbes website. However, there are tax complications that allow investors to take advantage of a 1031 exchange for vacation homes. Corporate stocks and partnership interests do not qualify for 1031 exchanges.

A delayed exchange requires a middleman to hold all of the associated cash while finding an eligible exchange property. This exchange is known as a swap. Other common exchange types include a three-party or Starker exchange, as stated by the Forbes website.

Investors must designate replacement property within 45 days of the sale of the original property, notes the Forbes website. Investors can also designate multiple replacement properties when appropriate. The transaction must also close within six months. Moreover, any cash involved in the exchange is taxable. This cash is known as "boot" in the transaction. The cash serves as partial sale proceeds from the property sale, subject to capital gains treatment. Investors partaking in 1031 exchanges must also consider any mortgages, as a reduction in mortgage is income to the taxpayer.

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