The following outlines the basic steps of a 1031 exchange (i.e. a delayed exchange) where an investor sells a property first and then purchases another property. There are different scenarios in which an exchange can work, for instance, a reverse exchange where an investor buys a property and then sells an existing property. For the purposes of this memo, we will focus on the delayed exchanges. As with any tax strategy, it is advised that you consult with your attorney and tax specialist/accountant.
The exchange must be between like-kind properties. All real property is considered like-kind with all other real property. For example, you can exchange a sale of land for the acquisition of an apartment building or vice versa. However, the real property purchased and sold must both be in the United States.
It is important to make sure all properties qualify for a 1031 exchange. The properties involved in the exchange cannot be used for personal use; however, vacation homes can qualify if they are held as rental properties for a specific amount of time. Overall, the properties must be viewed as business or investment properties.
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