If you own investment real estate, a tax provision, called a 1031 exchange, allows you to defer capital gains on the sale of an investment property by reinvesting in a like-kind property of equal or greater value. The swap cannot involve your home or vacation home, but other than that, you can exchange any type of investment property. For instance, you can exchange land for a commercial building or an apartment building for a shopping mall. 

To defer the gain, you must meet two rules:

  • You must identify the property you are going to purchase within 45 days of closing on your original property. You must then close on the new property within 180 days of the original property's closing or by the due date of your tax return, with extensions, whichever is earlier. 
  • You cannot take receipt of the sale proceeds from the original property. A third-party intermediary, such as an escrow company, must hold the funds until the new property is purchased. To defer all gains, you cannot receive any cash from the transaction.

Typically, the most difficult part of a 1031 exchange is identifying the new property within the allotted time frame. Recently, the Internal Revenue Service issued new regulations allowing the purchase of the new property before the sale of the original property.

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