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Though 1031 tax exchange rules can be daunting, they are well worth understanding. It's wise to begin by understanding the Qualified Intermediary (QI). QIs serve as a third-party, who hold the funds from the sale of the first property (the relinquished property) until they can be used to purchase the second (or replacement) property. So in order to qualify for the tax benefit, this tax code must be utilized.
Also, the concept of like-kind must be comprehended. The IRS regulations pertain to the exchange of like-kind properties. By way of illustration, a piece of commercial property could not be exchanged for a piece of raw land and still qualify for the tax benefit. It must be exchanged for a piece of commercial land.
Secondly, the definition of like-kind is slightly different, depending on whether you are a business or an individual. The definition of like-kind for a business does not account for the class or grade of the property: it does in the case of individual properties.
The tax exchanges code was devised to work in cases where the taxpayer sold an existing property and then purchased a replacement property. But not all transactions occur in this order. There is also what’s called a “reverse” exchange, where the order is reversed.
Take some time to understand both and you'll be glad you made the time investment to save a financial one.