1031 EXCHANGE-	Avoid Paying Tax on Sale


A person can avoid paying capital gains tax by utilizing a 1031 tax exchange.  You have 
45 days from the date of the recording of the deed of the sold property to identify a 
replacement one.  The replacement property must be identified in written document (a 
form called the “identification notice”) signed by the taxpayer and hand-delivered, 
mailed, faxed or otherwise sent to the exchanger (1031) and received before the end 
of the identification period.  Then, the tax payer has to close by or before the 180th 
day of the exchange which started at the recording of the deed.

The seller can buy multiple properties instead of one to replace the property sold.   
Keep in mind, you must trade “like kind” properties, which means, both the “old” and 
“new” properties must be held for investment or use in a trade or business.  For example, 
if you sell your rent house, you must buy another rent house (investment property). 

Here are the some guidelines: 

Rule 1.  3-property rule:  The taxpayer may identify as potential replacement 
property any 3 properties without regard to their fair market value.  However, 
the replacements must be equal to or more in equity of the old property. (Note:  see rule 2)

Rule 2.  200% rule:  The taxpayer may identify as potential replacement property 
any number of properties, as long as the aggregate fair market value of the properties 
does not exceed 200% of the aggregate fair market value of all the relinquished properties 
as of the initial transfer date.

Rule 3.  95% exception:  If the tax payer has identified more properties than are 
permitted under both of the 2 rules above, the tax payer must receive, by the end 
of the exchange period, the properties fair market value of which is at least 95% of 
the aggregate fair market value of all the properties identified.

The IRS looks at each exchange on a case-by-case basis.  It is also important to note:  
An investor cannot have a “constructive receipt” of the sales proceeds at any time during 
this exchange period or the money instantly becomes taxable income.  Avoid any potential 
problems by paying a professional “exchange facilitator” to act as a middleman who holds 
the sale proceeds and executes the exchange documents. Consult an accountant who is 
familiar with tax-deferred exchanges before deciding how to proceed.  For more questions, 
the 1031 Exchange can be reached at 888-770-0024.