If you are currently considering selling and acquiring property of similar value, perhaps a 1031 exchange is right for you. A 1031 exchange differs a typical real estate sale because the property is considered to be exchanged instead of sold. Partial exchanges also qualify and receive partial tax-deferred treatment. One of the main advantages of a 1031 exchange is that the taxes are deferred, unlike those of a sale. As no economic gain has been realized, the government allows you to bypass the payment of taxes.
Should you choose to follow the route of a 1031 exchange, it is important that you keep two major rules in mind:
1. The total purchase price of the replacement property must be either equal to or greater than the total net sales price of your relinquished property; and
2. All proceeds from the sale must be used to acquire the replacement property.
Your property must be used for the purpose of trade or business, or be held as an investment. It is important to keep in mind that the two properties need to be of like-kind and located within the United States.
If this sounds right for you, be sure to remember that you must identify a replacement property within 45 days of selling the relinquished property. Furthermore, the two properties must be exchanged within 180 days. These timelines may not be extended in any way, even should the final date fall on a weekend or holiday.
Ron Pennington is Chair of the Real Estate & Financial Services Practice Group at BoltNagi PC, a full service business law firm located on St. Thomas, Virgin Islands. Attorney Pennington concentrates his practice in commercial and residential real estate, acquisition, development and financing. To contact Attorney Pennington, please email: rpennington@vilaw.com or visit www.vilaw.com Leslie McIntosh, summer intern and law student at Charleston School of Law is co-author.