When a real estate investor sells real estate, a capital gains tax is recognized, along with a tax on deprecation recapture. The regular capital gains tax, deprecation recapture, and any applicable state tax can often result in a tax liability in the 20% to 25% range for the sale of real estate. (If the real estate has been held for less than 12 months, all of the gain will be taxed at much higher short term capital gains rates.)
A Section 1031 exchange, named for the applicable section of the Internal Revenue Code (also known as a Starker Exchange, Tax Free Exchange, or Like-Kind exchange), allows an investor to defer all tax on the sale of real estate if the real estate is replaced with other real estate pursuant to a detailed set of rules.
The replacement property must be identified within 45 days of the sale of the relinquished property.
(1) The replacement property must be purchased within 180 days of the sale of the relinquished property.
(2) The replacement property must have a purchase price at least as great as the relinquished property, otherwise some tax will be recognized.
(3) All of the cash proceeds from the sale of the...
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