A 1031 exchange lets an investor defer tax on the gain when selling investment property and buying replacement property. It is for investment or business property, not for your home.
What qualifies for a 1031 exchange
- Both properties must be held for business or investment use.
- Primary residences, second homes and vacation homes do not qualify.
- Only real property qualifies. Most real estate is like-kind to other real estate, such as a rental house and vacant land.
- Property held primarily for sale does not qualify.
The two deadlines
- 45 days: identify replacement property in writing, signed by you and delivered to someone involved in the exchange. Telling your agent or accountant is not enough.
- 180 days: complete the purchase within 180 days of the sale, or by your tax return due date including extensions, whichever comes first.
The IRS does not extend these for hardship, other than presidentially declared disasters. Missing a deadline makes the whole gain taxable.
The qualified intermediary
A qualified intermediary holds the sale proceeds. If you take control of the cash before the exchange is complete, it can fail. You cannot act as your own intermediary, and neither can your agent, broker, accountant, attorney or employee (or anyone in those roles in the prior two years). Choose carefully. Some intermediaries have failed.
Deferred, not erased
The gain is deferred, not eliminated. If you also receive cash or other property, you must recognize gain up to that amount.
For Virginia buyers
- Talk to your agent and your CPA before you list the old property.
- Make sure the closing dates fit the 45-day and 180-day deadlines.
- Ask your CPA how Virginia taxes the exchange.
Source: IRS Fact Sheet FS-2008-18. Part of our guide to owning a home in Virginia.
Talk to Glenn and Gift before you buy
Questions about buying replacement property? Call 703-707-0334 or send us your question.
General information for Northern Virginia buyers, not legal or tax advice. Ask your settlement attorney, title company or CPA about your situation.
