• Learn the rules for a 1031 property exchange.home sweet home image by David Dorner from Fotolia.com
  
  A 1031 exchange is a tax-deferred exchange whereby a qualified property is sold by the owner who then goes on to purchase another qualified property within a specific time frame in order to bypass taxes from the IRS. Essentially, although a property is being sold and another property is being bought, involving two separate transactions, a 1031 exchange treats the entire process as an exchange, therefore qualifying the owner for a deferred-gain treatment. Sales are taxable by the IRS. 1031 exchanges are not. It is important to keep in mind that there are very strict regulations defining what constitutes a qualified property.
  
  

Like Kind

• The most important rule in a 1031 property exchange is that the properties must be "like kind." This means that the two properties must be intended for the same productive purpose.The value of the new property must be equal to or greater than the value of the relinquished property. Furthermore, all equity received from the sale of the relinquished property must be used in the purchase of the new property.
  
  

Qualified Intermediary

• Second, the "exchange" must involve a qualified intermediary (QI). This person acts as a mediator for the funds and is required to be a person or entity that is independent and professional, with no former relationship with the exchanger prior to the 1031 exchange. The IRS code explicitly requests that the QI be a person/entity whose only contact with the exchanger be as a QI. The exchanger never comes in direct contact with the funds from the sale of his/her property. The proceeds from the sale of the first property goes to the QI, who then uses the money, under the direction of the exchanger, to purchase the new property.
  
  

Time Periods

• There are two time periods under the 1031 property exchange time frame. First, there is period of no more than 45 days during which the replacement property must be identified. This period begins on the day the first property is sold and grants exactly 45 days for the identification of a new property. Then, there is the exchange period that ends 180 days after the relinquished property is transferred to a new owner or on the due date for the tax return, whichever comes first. The exchanger must obtain the new property before the end of this period.