How it works:
- Just before closing, the property will be acquired from the seller by a holding company (called a “qualified intermediary”) & sold to you.
- This means the seller never takes possession of the funds, avoiding the immediate tax obligation.
- In most cases, this process doesn’t have an impact on the buyer. You’ll simply need to agree to make no objection to it happening.
Here are the general guidelines for a 1031 exchange:
It applies to investment property only, so the seller generally can’t swap a primary residence for another property. In some cases, it’s possible that a portion of the property that was designated an investment may be eligible for 1031 treatment.
You can generally exchange any investment real estate for almost any other investment real estate property. The IRS uses a “like-kind” standard, which says that property must be exchanged for like property. However, this is broad enough that you can exchange an apartment building for land, for example.
Most of the time, the 1031 transaction is processed as a “delayed exchange.” This means that the property can be sold first and then a replacement property can be found later. There is a time limit for purchasing the replacement property, however. You must “designate” the replacement property within 45 days, and then purchase it within 6 months of the sale of the original property.
Here are some additional resources: