Disposition in a 1031 exchange refers to the sale or transfer of the exchanged property. In a 1031 exchange, the property being sold (the “relinquished property”) is exchanged for another property (the “replacement property”).
Key-Takeaway
- 1031 exchanges are used to defer capital gains tax by exchanging one property for another.
- The disposition of the original property is referred to as the relinquished property.
- The new property acquired is referred to as the replacement property.
Example
A taxpayer owns a rental property and wants to sell it to upgrade to a larger rental property. Instead of selling the original property and paying capital gains tax, they can use a 1031 exchange to defer the taxes by acquiring a larger replacement property
Recommendations
- Seek the advice of a tax professional and real estate attorney to ensure compliance with 1031 exchange regulations.
- Carefully consider the timeline and deadlines associated with 1031 exchanges to avoid triggering taxable events.
- Choose replacement properties wisely and make sure they meet the criteria for a 1031 exchange, including the like-kind and investment requirements.