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1031Exchange policy allows you to exchange a piece of investment property to similar kind of investment property without paying capital gain tax. This is really important to know if you are investing in real estate because paying less tax means more money on your side. Of course, you pay capital gain tax when you sell the property and not investing it to another property. But if you keep exchanging it, you won't have to pay tax until you sell. Since there is more money on your side, you can exchanging it for a little bigger property each time and amount of money will compound faster than paying tax each time. Without having to pay capital gain taxes generates far more profit on your investment. You obey the law but the law is working on your side.
All US properties are considered to be "like kind" as long as it is a investment purpose. This means you can exchange a condominium complex for office building, a condo for a house etc. Residential and vacation homes are not investment properties. Foreign properties are not also considered to be exchanged with US property.
In order for 1031 exchange to work, the seller has to hire accommodator to do the transaction of exchanging property. The law is seller can not have control of funds for transaction, otherwise the tax deferral is not applied. What it means is that if A sells property to B, B can not just transfer money to A, B has to go through accomodator. The accommodator usually holds the money in escrow until A finds another property to exchange. In case escrow period is long and seller receives interest from it, IRS can not void tax deferral.
When exchanging property A should find property within 45 days from the sale date. The properties doesn't have to be one but upto three are allowed. The actual purchase of the property should be made within 180 days from the sale date. The new property value shouldn't be more than 200% of old property. If you don't find and purchase the property within specified time, you have to pay capital gain tax on the old property. Also, you don't have to hold the property for a specific time to receive 1031 exchange tax benefit, the property can be traded quickly.
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