The term “up leg” refers to the property that an investor is acquiring. A 1031 exchange, also known as a like-kind exchange, allows investors to defer capital gains taxes when they sell a property and reinvest the proceeds into a new, “like-kind” property. The entire transaction essentially consists of two main legs:
- Down Leg (or “Relinquished Property”): This is the property the investor is selling or relinquishing. It’s the property from which the capital gains would ordinarily be realized if not for the 1031 exchange process.
- Up Leg (or “Replacement Property”): This is the property the investor is buying or acquiring to replace the relinquished property. The funds from the sale of the relinquished property are used to purchase this property, and doing so allows the investor to defer the capital gains tax.
It’s essential for investors to meet specific criteria and follow set timeframes to benefit from the tax deferral offered by a 1031 exchange. For instance, the replacement property must be identified within 45 days of selling the relinquished property, and the transaction must be completed within 180 days.