1031 Exchange

The purpose of a 1031 Exchange is to allow you to defer the capital gains taxes due on the sale of investment real estate when you are also purchasing a replacement property. It is also known as a like kind exchange or a Starker Exchange (after the person that blazed the trail for this procedure). To qualify it is only necessary for the property to be investment real estate and for it to be located in the United States (your own residence would not qualify). Although it is called an exchange you do not actually exchange your property with the seller of your replacement property, instead there is a middle man known as a Qualified Intermediary or an Accomodator.

To fully defer the capital gains taxes the replacement property must be of equal or greater value and you must reinvest all of the proceeds in the replacement property

The rules require a "Safe Harbor" to take posession of the proceeds after the sale of the Relinquished property. Usually the accomodator will hold the proceeds until the purchase of the replacement property completes.

The title holders of the new property must be the same as the title holders of the old property.

45 Day Rule

Following the close of escrow on the sale of your old property, you have 45 days in which to identify up to three replacement property.

Three property Rule

You may identify up to three replacement properties without regard to their fair market value.

200 Percent Rule

You may identify any number of properties provided that the combined fair market value does not exceed double the value of the relinquished property.

180 Day Rule

Following the close of escrow on the sale of your old property, you have 180 days in which to close escrow on the purchase of the property that was identified under the 45 day rule.

Reverse Exchange

It is even possible to make a reverse exchange where the replacement property is purchased prior to the sale of the relinquished property. The rules for this procedure are more complex than for a forward exchange and the fees involved are greater so the forward exchange is the preferred method to use.

Jim Forsyth (760) 617-3390
College Realty Inc. GMAC Real Estate
14767 Bear Valley Road
Hesperia, CA, 92345