1031 Exchange also known as the Starker, or a like-kind exchange allows investors to defer capital gains i.e. profits after a sale.
Types of 1031 exchanges:
- Simultaneous
- Standard
- Delayed
Critical timelines:
- Identification period – you have 45 days after close of escrow i.e., sale to identify a replacement property or properties.
- Closing period – you have an additional 135 days to close on the replacement property.
The replacement property must:
- Be like-kind, i.e., any property held for investment purposes or used in a trade or business.
- Be of equal or greater total value i.e., you must obtain the same or greater amount of debt and reinvest all of your equity. If you want to take on less debt, then you will be required to increase your equity.
- Retain the same ownership structure in the replacement property. In other words, if you were an LLC, a partnership, or an individual owner in the sold asset, then that ownership must be preserved in the new asset.
Qualified Intermediaries (QI) must be engaged prior to selling your asset. QI is a designated, independent third party that holds and distributes funds. QI cannot be your broker, accountant or attorney.