1031 Tax Deferred Exchange

Montana Real Estate TOOLS:

What is a tax deferred exchange?

A tax deferred exchange allows a property owner to exchange one property for another without having to pay any capital gains tax upon the transaction. In an ordinary transaction, the property owner is taxed on any gain realized by the sale of the property. But, in an exchange, the tax on the transaction is deferred until some time in the future, usually when the newly acquired property is sold.

In an exchange, a property owner simply disposes of one property and acquires another, rather than a sale of one property and a purchase of another.

Sale and reinvestment in a replacement property can be achieved by means of an exchange agreement and the services of a qualified intermediary.

Tax deferred exchanges are authorized by Section 1031 of the Internal Revenue Code. The requirements of Section 1031 and other sections must be carefully met. When an exchange is done properly, the tax on the transaction is deferred.

Exchange Services, Inc. provides intermediary services for 1031 tax deferred exchanges.

Requirements for a Valid Exchange

Qualified property
In general, all property, both real and personal, can qualify for tax deferred treatment.

The Purpose Requirement
Any property other than a principle residence or dealer property (property acquired for resale) qualifies.

Like-Kind Requirement
All real property is like-kind, regardless of whether it is improved or unimproved and regardless of the type of improvement or interest. Exchanging from real property into personal property does not meet the like-kind requirement.

Time Limits
The exchanger is required to identify the replacement property(s) within 45 days after the transfer of the relinquished property, and has a total of 180 days to close on the replacement property.

Multiple Properties
Whether one property or more than one property is transferred by the exchanger as part of one exchange, the number of replacement properties that may be acquired is:
1. Up to three properties without regard to their fair market value (The Three Property Rule).
2. More than three properties, if the total fair market value of all these properties at the end of the 45 identification period does not exceed 200% of the total fair market value of all properties relinquished in the Exchange (The 200% Rule).

Return to the previous page

Rocky Mountain Real Estate has its office in Downtown Whitefish, Montana. Whether you are a buyer or seller, we look forward to the privilege of representing you.