Know the Difference Between Section 1034 and 1031: Defer Taxes on Investment Property Profits

Many taxpayers think 1031 Exchanges are complicated because the rules are different from what they are accustomed to seeing in Section 1034, which deals with personal residences. There really is a simple logic to Section 1031 Exchanges as well.

The old Section 1034 law, which was repealed a couple years ago, dealt with the sale of personal residences. When selling your old house, you had 2 years to buy a new house worth equal or up, and the gain rolled over from the old house to the new. Section 1031 does the same thing for investment property that Section 1034 did for your personal residence-the gain rolls over from the old to the new.

There are six differences between Section 1034 and Section 1031 that you need to be aware of when you consider a 1031 exchange:

1. Both your old and new property must be investment property. Rental property, bare land or vacation homes are examples of investment property. If you meet this criterion, you can sell any type of property (i.e. apartment building) and buy any other type of property (i.e. office building). 
2. From the date of closing on the sale of your old property, you have 45 days to come up with a list of properties you would like to buy. This is called your 45-day list, and we recommend that this list contain 2 or 3 potential properties. 
3. Also from the date of closing on the old property, you have 180 days to close on the new property. The purchase property must one of the properties on your 45-day list.
    
4. You cannot touch the money. By law, the money must be held by a Qualified Intermediary (also called an Accommodator or Facilitator) who is also responsible for the preparation of paper work required by the IRS to document the exchange. 
5. The titleholder must stay the same. Whoever held title to the old property must be the titleholder of the new property. 
6. You must reinvest all of your cash, and your new property must be at least equal to the net sale price of the old property. If not, you pay tax on the difference.

By following these simple rules, you can enjoy one of the last loopholes in the tax code.