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Know Your Terms
By Priya Jestin, Staff Writer
A 1031 exchange is already a very complicated kind of transaction. What makes it even more difficult to understand are the various terms used in the business. While the intricacies cannot be simplified beyond a point, the terms can be easily explained. Here are a few of the more common ones:
- Real Property Use: Your old and new properties must qualify as investment or business use. If both properties pass this test, then only can you can exchange.
- 45-Day Period: You have 45 days from the closing of your sale to list the properties you may want to buy. There are no exceptions to the deadline.
- 180-Day Period: Once you close the sale, you have 180 days from that date to close on the purchase of one or more properties from the 45-day list. There are no exceptions to this deadline either.
- Qualified Intermediary (QI): As per IRS diktat, you must use a QI to prepare the legal documents for your exchange. It is important that the QI be independent, and it cannot be your friend, employee, broker, or even your accountant or attorney.
- Proper title holding: You must purchase and take title to your new property exactly as you held title to your old property.
- Reinvestment Requirement: If you want to defer all of your capital gain tax, you must buy a property equal or higher in value than the one you sold. You must also reinvest all the cash proceeds from your sale.
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