As I wrote in Part 1 of the 1031 Exchange series, Section 1031 of the Internal Revenue Code provides a remarkable opportunity to build wealth by deferring taxes.  Within carefully defined limits, investors may carry forward gains made on one property into another one, deferring capital gains tax, allowing full use of equity in the acquisition.  Let’s continue with the important points.

Fully Deferred Exchange
For an exchange to be fully tax-deferred, replacement property must be equal to or greater in value and equity than that of the relinquished property.  In addition, debt on the replacement property must be greater than or equal to the debt on the relinquished property, unless cash is added to offset debt.

Replacement Property
An investor may identify replacement property according to the following rules:

• 3-property rule – three properties, regardless of value
• 200 percent rule – any number of properties, as long as their combined fair market value does not exceed twice the value of the relinquished property
• 95 percent rule – any number of properties, regardless of their combined fair market value, as long as you acquire 95 percent or more of the total value of such properties

Read Part 1

Read Part 3

Read Part 4

Please contact Michael Zimmerman if you have a specific question about 1031 exchanges or visit my web site to find investment opportunities using my Honolulu home search.

This information is provided as a courtesy only, is not a warranty and should be independently investigated by buyers. This information is deemed reliable, but NOT guaranteed.  Consult your attorney and tax advisor before you exchange investment property.

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