A 1031 exchange, also known as a like-kind exchange, is a tax-deferment strategy that allows real estate investors to defer capital gains taxes on the sale of investment property. This means that instead of paying taxes on the profits from the sale of the property, the investor can use those funds to reinvest in a new property and defer the taxes until a future sale.

To qualify for a 1031 exchange, the properties being sold and purchased must be “like-kind” properties, which means they must be of similar nature, character, or class. This includes any kind of real estate, whether it be residential, commercial, or industrial.

There are strict rules and timelines that must be followed when participating in a 1031 exchange. For example, the investor must identify a replacement property within 45 days of the sale of their current property and complete the exchange within 180 days.

Certainly, provided that it has been utilized for productive purposes in a trade or business, it is deemed to be of like-kind with all other categories of real property.

“Boot” is an important concept to understand in a 1031 exchange. If you receive boot, it will be subject to capital gains tax and may also be subject to depreciation recapture. It’s important to work with a qualified intermediary who can help you navigate the rules and regulations of a 1031 exchange and ensure that you maximize the tax benefits of the exchange.

To identify replacement property, you must submit a written description that is clear, signed by you, and delivered or sent before midnight on the 45th day. Kolinsky Wealth Management will furnish you with the necessary forms to help fulfill this obligation.

Qualified Intermediaries are designated to execute the exchange and complete the required documentation for tax deferral. However, we are not allowed to offer guidance on the advisability or tax consequences of the exchange.

If you have received proceeds from the sale, directly or indirectly, it may hinder your ability to include the property in a tax-deferred exchange. This underscores the importance of clearly stating your intent to incorporate this transaction into a tax-deferred exchange within the sales contract for the relinquished property.

In cases where you have entered into a sales contract but have not yet finalized the deal, there might still be an opportunity to proceed with a deferred exchange. To do so, it’s essential to complete the requisite exchange documentation, identify the replacement property within 45 days of the sale’s closure, and ultimately take possession of it within 180 days or prior to your tax return’s deadline. Consulting with your attorney or tax advisor is highly recommended for proper guidance to navigate this process.