One of my favorite tax-deferred vehicles for real estate is the use of like-kind 1031 exchanges. The actual law will vary from state to state so this post should be construed strictly as informational and a general rule of thumb. A 1031 Like Kind Exchange is typically used in real estate transactions although many other assets, businesses and commodities can be transferred (hence like-exchange) to a new purchase. The idea is to defer the tax burden triggered on the sale of an appreciated asset and roll the proceeds into a Like Kind purchase. The tax will have to be paid at some point in the future upon the sale of the new asset unless another 1031 exchange is used. As you can see if your not looking for liquidity the tax-deferred snowball can get quite large.
Some quick deal points to keep in mind when dealing with 1031 Like Kind Exchanges
* A qualified Intermediary needs to be elected to hold funds in escrow from the sale of the first asset and before the second is consummated.
* There are 2 time line requirements that need to be met:
1. The replacement property needs to be identified within 45 days from the sale of the first property.
2. The replacement property must close within 180 days from the sale of the first property
Be sure to consult an attorney when dealing with 1031 exchanges because of the nuisances in state law. More importantly an attorney can properly identify the intermediary and ensure the HUD statement is correctly filled out, especially if bank financing is involved. The $500 bucks you will spend will far outweigh a mistake of having to swallow your tax burden.