Balancing the exchange in a 1031 exchange refers to the process of ensuring that the fair market value (FMV) and debt of the replacement property is equal to or greater than the FMV and debt of the original property being sold. This is a requirement under IRS rules for a 1031 exchange to be considered a tax-deferred exchange.
- Balancing the exchange in a 1031 exchange refers to the process of ensuring that the fair market value (FMV) and debt of the replacement property is equal to or greater than the FMV and debt of the original property being sold.
- This is a requirement under IRS rules for a 1031 exchange to be considered a tax-deferred exchange.
John wants to sell his rental property and use the proceeds to purchase a replacement property through a 1031 exchange. He finds a suitable replacement property and performs a preliminary assessment of its FMV and debt to ensure that it is equal to or greater than the FMV and debt of the original property being sold. This is referred to as balancing the exchange and is a requirement under IRS rules for a 1031 exchange to be considered a tax-deferred exchange.
- Assess the FMV and debt of the replacement property carefully before proceeding with the exchange to ensure that it meets the requirement of balancing the exchange.
- Keep accurate records of the FMV and debt of the original property and the replacement property for tax purposes.
- Consult with a tax professional and a qualified intermediary (QI) to fully understand the requirements of balancing the exchange in a 1031 exchange.
- Consider the use of a qualified intermediary (QI) when conducting a 1031 exchange to ensure that the exchange meets IRS requirements and to avoid actual receipt of the sale proceeds.
