A 1031 Exchange can be a powerful tool to create additional wealth, as the investor keeps money that would ordinarily be paid in taxes. However, not every property transaction qualifies as a 1031 Exchange. There are four basic rules that govern every 1031 Exchange:
The property in question must be held for productive use in a trade or business or for investment purposes – it cannot be your personal, primary residence.
The property exchanged must be “like kind” property, meaning the relinquished property and acquired property are similar in nature or character.
The purchase price of the replacement property must be equal to or greater than the sale price of the relinquished property.
All the equity received from the sale of the relinquished property must be used to purchase the replacement property.
If your transaction fails to meet any one of these requirements, partial or full tax responsibility may be incurred. This is why it is important to rely on the expertise of a qualified intermediary to guide you through the 1031 Exchange process.