What is a 1031 Tax Deferred Exchange?
When an investor sells a rental property, typically the investor is taxed at a rate of 15-20% upon the sale. The 1031 Exchange is a tax code that allows the investor to defer the tax hit to a later date by purchasing a different property with the proceeds. The exchange must adhere to a strict process established by the IRS that looks like:
The Investor sells the property with the proceeds then held by a Qualified Intermediary who retains the funds for safe keeping until a replacement property is purchased.
The investor has 45 days from the sale date of the property to identify (in writing to the Qualified Intermediary) a replacement property or a list of 3 potential replacements. If this notice to the Qualified Intermediary is not done within 45 days, the investor must pay the tax on the sold property.
Then the investor has 180 days to close on one of the 3 identified properties. If they miss the date, they are not eligible for the tax deferment and must pay the tax at year end on the previously sold property.
Not all Investors chose to do a 1031 exchange if they sell and then buy another property. But, they must always purchase a Landlord insurance policy on that property to insure against losses.
Denver West Insurance Brokers always welcomes questions and are here to assist any investor in the Denver Area who is looking for Landlord insurance on their rental property.
Disclaimer: The 1031 exchange has many rules and regulations and you have to make sure you complete the exchange correctly to avoid a large tax ill from the IRS. We always recommend that you visit with your Qualified Intermediary and consult your attorney or accountant for any specific tax or legal advice.
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