1031 tax deferred exchanges allow investors to defer capital gain taxes.  This tax savings provides allows for the preservation and reassignment of equity. A 1031 exchange can also help investors by utilizing:

1. Leverage: Move from a position of high equity to low equity in a larger asset to improve ROI

2. Diversification: Move from a single type of real property into multiple for financial safety

3. Streamline Management: Move from multiple properties into more closely associated or positioned properties to ease the cost of expenses

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6 RULES FOR 1031 TAX EXCHANGES

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Rule 1: Like-Kind Property

To qualify as a 1031 Tax Exchange, the property being sold and the property being acquired must be “like-kind" or "of the same nature or character, even if they differ in grade or quality." In terms of real estate, you can exchange almost any type of property, as long as it’s not personal property. Both the properties for sale and purchase must also be within the United States to qualify.

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Rule 2: Investment or Business Property Only

A 1031 is only applicable to Investment or commercial property. And while those types of properties are broad, they must clearly be used for commerce and not personal residence.

For example:

1. Exchanging a personal home in Louisiana for a personal home in Texas would not qualify.

2. Exchanging a single-family rental in Louisiana and for a similar rental in Texas would be allowed.

3. Exchanging an apartment building for multiple duplex units would be allowed.

4. Exchanging a single family rental property for a commercial office building would be allowed

5. Exchanging a vacation rental for a strip center would be allowed.

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Rule 3: Greater or Equal Value

In order to defer 100% of the capital gain tax of the sale of any investment or commercial property through a 1031 Exchange the purchased property or properties must have an equal or greater value than the one sold.  Capital gain will be applied to any value outstanding. This is called a "boot". Acquisition costs, such as inspections and broker fees do apply toward the total cost of the new property.

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Rule 4: Same Tax Payer

The tax return ID on the title of the property being sold must be the same as the tax return ID and title holder that buys the new property. The only exception to this rule is when a single member LLC is selling or buying a property and the same single member is selling or purchasing the exchange property under their personal name and social security number.

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Rule 5: 45 Day Identification Window

The owner/investor has 45 calendar days following the sale of their property to identify up to three potential properties of like-kind. An exception to the 3 property limit is known as the 200% rule. The 200% rule allows the investor to identify four or more properties as long as the value of those four combined does not exceed 200% of the value of the property sold.

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Rule 6: 180 Day Purchase Window

Finally, the closing of all purchased properties must take place within 180 calendar days (6 months) following the closing of the original property. The exception to this timeline is when the property owner files a tax extension, in which case the 180 day window begins on the date of the extension.

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