First a little background: Internal Revenue Code Section 1031 allows real estate investors to roll profits from one investment property into another investment property of equal or greater value without paying capital gains tax on the profit from the sale of the original property.
The capital gains tax can be deferred indefinitely, through a series of exchanges, until the investor eventually “cashes out.”
The IRS has strict rules that must be followed exactly in order to qualify for a tax-deferred exchange:
B 1) The equity (property value minus loan balance) in the new property must be equal to, or greater than the equity in the old property.
2) The replacement property must be must identified within 45 days after closing the sale of the old property.
3) The purchase of the new property must completed within a total of 180 days after closing on the sale of the original property.
The investor cannot have “constructive receipt” of the sale proceeds at any time during this exchange period or the money instantly becomes taxable income.
This problem is usually avoided by paying a professional “exchange facilitator” to act as a middleman who holds the sale proceeds and executes the exchange documents.
The IRS looks at each exchange on a case-by-case basis and tries to determine your intent.. Please consult an accountant who is familiar with real estate tax-deferred exchanges before deciding how to proceed.