I am a tax accounting analyst and Atlanta_Bob has it right. Basically, a section 1031 is known as like kind exchange. Initially it was geared towards exchanging like property without having to pay tax on that exchange.
You will only have to pay tax on boot or tax received. That usually is the case if you sell for a higher amount then the next property that you’re buying. So if you sell one home at $140K and the new property you invest in is $130K, you’ll be subject to tax on the difference of $10K.
There is a lot more to talk about, but I’m tired. Your best bet is to contact your CPA to determine the best way to handle the transaction.
Posted by LP (Maui, HI) on October 11, 2003 at 20:47:26:
Hello TH,
The best advice is to contact a CPA, it will be well worth the money. After all you want to get this right, if one thing isn’t handled properly, the whole thing gets taxed. For instance, stringent timeframes need to be met and monies must be handled by authorized agents and a CPA can give you that info as well.
Posted by Atlanta_bob on October 11, 2003 at 20:36:32:
Go to Google.com and search for “1031 Exchange”, where you’ll find several good web sites that can explain (in detail) what a 1031 Exchange is and what the rules are for using one. Basically, you can sell your property, have ALL the profits delivered to a “holding agent”, then buy another property within 180 days of closing. Before you sell your property, you have to identify the property (or properties) that you plan to buy. You only have to buy one of them; not all of them.
You don’t get to keep any of the money received when you sell your property. All $$ must be re-invested into the new property. The lien on the new property has to be more than the lien you had with the property you just sold. Otherwise, you pay paxes on your “boot”.
Like I said, Google.com will list several web sites that can explain a 1031 Exchange much better than I. Not a complicated matter, just certain rules that you must follow.