If you are into business, particularly the Real Estate business, it is important that you know what a 1031 EXCHANGE means. Many people have never heard of this exchange. The IRS created the 1031 Tax Exchange in 1990. Its main purpose is to aid real estate investors or persons who are into the real estate business. The benefit an investor gets from this is through re-investing their gains on similar properties they exchange for their old properties. Although it may appear like a basic tax deferral procedure, it is important that you know and understand what the exchange rules are, especially if you are into this kind of business.

Just like in any other business, there are some requirements for you to qualify and get the most out of this 1031 code.

For each transaction, there should be a minimum of at least two properties involved-the property you are going to sell and the property that you will replace it. These properties need not be the same, as long as they are actively used in your business or trade. Take note that your personal home does not qualify for this exchange.

Have a real estate lawyer help you with the contract. You can also hire a “qualified intermediary” to help you. The IRS refers to this as a person who enters into a written exchange contract along with you to acquire and transfer the asset you give up and then to acquire the property you choose to replace your old one and transfer it to you. This contract or agreement should expressly limit your rights to pledge, borrow, receive or obtain the benefits of money or property held by the qualified intermediary.

It is vital to follow the letter of the law. The wordings of the contract must reflect your intention to do a 1031 exchange. The closing date for the new property must not be later than six months after the exchange or sale of the other property. The IRS is very strict on these rules of exchange, so it is better to seek the help of your tax attorney or other professional qualified to do this job. If you own a rental property, which appreciates in value in a good market, you could try to re-invest it into a lesser but promising market in the near future. This could allow you to gain a lot of money without the burden of paying a high tax. If you want to benefit from this kind of exchange, you must acquire the properties within 180 days from the sale of your old property. Remember that the 1031 Exchange Rules must be followed closely to get the most benefit from your tax deferral at year’s end.

All of this can greatly help you. More assets mean a good investment for you. By following the 1031 rules properly, you could benefit by acquiring a higher priced property in exchange for your old and lower-priced one without paying the extra burden on due taxes.

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