A 1031 exchange is an excellent tool available to owners of investment real estate. Section 1031 of the Internal Revenue Code states, in effect, that upon the sale of an investment property or real property used in a trade or business, the owner can use the funds from the sold property to purchase a similar, or "like-kind" property, and thus not be liable for capital gains taxes on the proceeds from the initial property. To complete a 1031 exchange, there are some basic rules that must be followed.
The "like-kind" property must be identified within 45 days of the closing on the initial property. All proceeds from the initial sale must be turned over to a "qualified intermediary" (QI), who is the person or company that essentially plays the role of the middleman. Any of the proceeds not under the control of the QI, are subject to taxation.
The QI will hold the funds from the initial property in escrow until such time the closing on the second property occurs. The QI will also assist the owner with the preparation of paperwork and other services to ensure the transaction progresses smoothly. Additional 1031 exchange rules require that the new property acquired by the investor much carry the same or greater debt than the initial property, and that the closing on the second property takes place within 180 days following the close on the first property.