This is a great question we get from time to time about 1031 tax exchanges:

"Do 1031 tax exchanges work if you buy and sell property in different states?"

1031 tax exchanges are designed to defer the capital gains taxes on homes sold if the funds are used to purchase a similar or like-kind property. This also works if the investor is purchasing property in another state than the state in which he or she currently owns. For instance, if you are selling a property in Portland and want to buy a similar investment property in San Diego, you can do so as long as the properties are similar in value. If the value is too far away, the exchange cannot work.1031 Tax exchanges in Portland Oregon

Also, this must be for an investment property and not your primary residence. These only work for commercial or residential investments or rentals but may be used on condos, houses or multi-family as long as the properties are similar.

The investor will need a Qualified intermediary or QI to facilitate the deal.  A qualified intermediary is an eligible person that enters into this type of an agreement and acts as an intermediary qualified under the agreement for a 1031 tax exchange. The intermediary agrees to assume certain documentation and withholding responsibilities in exchange for simplified information reporting for its foreign account holders and the ability not to disclose proprietary account holder information to a withholding agent that may be a competitor. Now, this is the industrial definition but what it really means is a intermediary or third-party middleman to conduct or facilitate the transaction between the buyer, the seller, the agents and the lender.

"The qualified intermediary acquires the relinquished property from the taxpayer, transfers the property, acquires the replacement property and transfers the replacement property to the taxpayer." [Source] This is as basic as it gets. However, the taxpayer or owner/buyer still needs a real estate agent to conduct and facilitate the transaction on both sides. If you are moving or exchanging property within the same area such as the Portland metro area, the agent can do both sides but if you are selling one place and buying another then you will need an agent in the new area of purchase or if you are selling out of state and buying in the Portland area you'll need a Portland real estate agent in order to acquire a similar or like kind property.

Anyone that owns an investment or business property could qualify for a section 1031 deferral including individuals or even companies and corporations. It's basically a swap of one similar property for another. Both properties must be similar enough to qualify such as the same nature, character and class. The quality or grade doesn't matter as much but most real estate agents will be able to determine a similar property. There are regulations and eligibility requirements on these types of properties.

Also, there are time limits to complete the section 1031 tax exchange. The first limit is that you have 45 days from the date you sell the relinquished property to identify potential placement properties. The second limit is that the replacement property must be purchased and the exchange completed no more than 180 days after the sale of the original property.

If you're interested in learning more about 1031 tax exchanges and potentially changing your investment property into another feel free to give me a call at any time. I would be happy to answer questions you may have and set you on the right path for success.

 

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