What is a 1031 exchange?

‘Section 1031 Like-Kind Exchange’ is a part of the Residential Purchase and Sale Agreement.

What is it addressing?

In the Northwest Multiple Listing Purchase & Sale Agreement it is simply an agreement between Buyer & Seller to cooperate in signing the necessary closing papers required for the party doing a 1031 exchange to complete that part of the process.  It also insures no additional cost or liability for the party of the transaction not doing a 1031 Like-Kind Exchange.

What is a 1031 Like-Kind Exchange?

A Section 1031 Like-Kind Exchange applies in real estate to investment property.  A “1031 Exchange” provides an exception the IRS code and allows you to postpone paying tax on the gain if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange.  To qualify, property owners must exchange real or personal property (the relinquished property) for other property of  “like-kind” (the replacement property).   It is important to get an understanding of “like-kind”.  In some scenarios the relinquished property may be an obvious like-kind to the replacement property.  However, if there is any question it is extremely important to consult a full-time 1031 facilitator &/or an experienced tax professional prior to the transaction.

An exchange must be planned ahead of the sale and must include a qualified intermediary to handle the transfer and handling any of funds.  This type of transaction involves many details and financial planning with a facilitator and your CPA.  Including strict deadlines that must be met.

For more detailed information consult the following IRS Fact Sheet and consult a tax professional.