If you’ve inherited a property, sold it and want to save on taxes, there’s a federal rule that can help: the 1031 exchange. This rule allows you to postpone paying taxes on the gain if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange. However, it’s important to discuss the legal and tax implications with a lawyer or accountant. A 1031 exchange is a valuable investment tool that, if used properly, can help property owners maintain profits, according to Ron Schultz, executive vice president at Colliers in Tampa.
Below are some of the important points to keep in mind.
- The first limit is you have 45 days from the date you sell the relinquished property to identify potential replacement properties. The identification must be in writing, signed by you and delivered to a person involved in the exchange like the seller of the replacement property or the qualified intermediary. However, notice to your attorney, real estate agent, accountant or similar persons acting as your agent is not sufficient
- The replacement properties that are identified in the written document must be described clearly, including a legal description, street address, or distinguishable name in the case of real estate. The IRS provides guidelines that must be followed regarding the maximum number and value of properties that can be identified.
- The second limit for a 1031 exchange is that the replacement property must be received and the exchange must be completed within 180 days after the sale of the relinquished property, or the due date (with extensions) of the income tax return for the tax year in which the property was sold, whichever is earlier. Additionally, the replacement property must be substantially similar to the property that was identified in writing within the 45-day limit.
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