When a property is sold, the realized financial gain or loss must be recognized in that transaction, and a gain is subject to tax. Instead of selling a property, paying taxes on it, and then using the reduced after-tax proceeds to buy other real estate, Section 1031 of the Internal Revenue Code (IRC) allows you to defer the capital gains tax owed. This allows you to reinvest more of the profit you received and to reinvest it into better property(s) of greater value.

IRC 1031 states that no gain shall be recognized on the exchange of property held for productive use in trade or business or for investment, if such property is exchanged solely for property of like kind.

To qualify for the 1031 exchange, the following requirements must be met:

• There must be at least two properties in the exchange
• One ( or more) that you are selling and one(or more) that you are replacing it with

Property that you own for personal use (primary residence or vacation home) does not qualify

To defer all of your capital gain, the purchase price of the replacement property(s) must be equal to or greater than the sales price of the sold property. In addition, all of your sale equity must be reinvested in the replacement property.

A qualified intermediary must handle a 1031 exchange transaction. The IRS does not allow a person to receive cash proceeds in any way, or else taxes will be owed. The intermediary is the one who legally sells the first property to buy the replacement property on your behalf.

The following are some general rules that must be met for a 1031 exchange to occur:

• Express your intentions to perform a 1031 exchange in writing to the intermediary
• Within 45 days from the closing date of the relinquished property, identify one or more potential replacement properties
• Within 180 days from the closing date of the relinquished property, acquire one or more replacement properties which have been identified.

Recognizing that each person's financial situation is unique please be sure to contact your tax advisor for specific information on assessing yours.