Rules of a 1031 Business Exchange

As businessmen, we are always looking for the next investment opportunity.  The good thing is that there’s always options available, such as buying a new property.  What a lot of people haven’t heard of, however, is exchanging properties.  This is called a 1031 business exchange, which is the swap of properties that are held for business or investment purposes.  There are many advantages of this type of transaction, such as the ability to dispose of a property without any immediate tax liabilities from the sale.  That being said, there are many rules to this exchange; here are some of them.


Like-Kind Property

The two properties being exchanged must be “like-kind.”  This means that they must be seen as the same character or nature by the IRS to qualify.  For example, an apartment can’t be swapped for metal equipment, as they aren’t considered the same type of asset.


Must Be An Investment or Business Property

Since it can only be an investment or business property, this means that personal property doesn’t qualify.


Same Taxpayer

The tax return and the name that appears on the title of the property sold must be the same as the tax return and title holder that buys the new property.  As your New York real estate attorney will tell you, however, there is an exception to this rule.  This exception occurs when the company is a single-member limited liability company.


There’s a 45-Day Identification Window

After the first property is closed, the property owner has 45 days to find 3 potential properties that are like-kind.  This is a difficult part of the process, as the potential properties have to fulfill the owners expectations as well.


There’s an 180-Day Day Purchase Window

The exchange must be completed no later than 180 days after the sale of the property or 180 days after the due date of the income tax return for the tax year in which the property was sold.


This is a general overview of the rules, but your New York real estate attorney will inform you on all of the other details that you need to know.  If you’re interested in making a 1031 business exchange, give us a call at Gary Wachtel.

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