When you sell investment real estate, you may face a large tax bill. However, a property exchange under 1031 of the tax code can defer the tax.
Any types of investment property may be traded. You might exchange a shopping center for an apartment house, for example.
Say you are relocating from Maine to Florida so you no longer want to manage a building in Maine. You could sell your Maine property and have the proceeds held by an unrelated party called an accommodator.
From the date of sale, you have 45 days to identify a new property. Within 180 days of selling your real estate in Maine, you close the deal for a property in Florida. The accommodator uses the Maine sales proceeds to buy the Florida building.
Then the accommodator transfers the property to you so you’ll have real estate you can manage first-hand after you move to Florida. You won’t owe any tax if you don’t pocket cash or have a lower mortgage. However, any cash received or reduced debt will be taxable income.
