1031 Exchange Defined:
- Otherwise known as a tax deferred exchange is a simple strategy and method for selling one property, that’s qualified, and then proceeding with an acquisition of another property (also qualified) within a specific time frame. The logistics and process of selling a property and then buying another property are practically identical to any standardized sale and buying situation, a ”1031 exchange” is unique because the entire transaction is treated as an exchange and not just as a simple sale.
- The Identification Period: This is the crucial period during which the party selling a property must identify other replacement properties that he proposes or wishes to buy. It is not uncommon to select more than one property. This period is scheduled as exactly 45 days from the day of selling the relinquished property. The 45 day’s timeline must be followed under any and all circumstances and is not extendable in any way.
- The Exchange Period: This is the period within which a person who has sold the relinquished property must receive the replacement property. This period ends at exactly 180 days after the date on which the person transfers the property relinquished or the due date for the person’s tax return for that taxable year in which the transfer of the relinquished property has occurred, whichever situation is earlier.
1033 Exchange Defined:
- Internal Revenue Code Section 1033 may provide favorable capital gains tax-deferral treatment if a property owner loses their property through an “involuntary conversion”. An “involuntary conversion” occurs when property is destroyed, stolen, condemned, or disposed of under threat of condemnation and the property owner receives other property or money in payment.
- If the property owner has a capital gain resulting from the “involuntary conversion”, they may elect defer the capital gain liability by purchasing ”like-kind” replacement property within a specified period of time. The 1033 election may be determined by the property owner that was subject to the “involuntary conversion” within the 2 or 3 year replacement period (depending upon the circumstance). The property owner would need to file an amendment for a tax refund for each of the 1, 2 or 3 year periods in which gain from the “involuntary converted” property was reported.
*For 1031/1033 Exchange Requirements, contact our team at: (760) 929-9700