1031 Exchanges

What is a 1031 Exchange?

When you sell real estate property for a profit, you normally have to taxes on any profit at the time of sale. However, the IRS provides an exception that allows you to delay paying the taxes on the profit if you reinvest the proceeds in similar property as part of a Qualified 1031 Exchange. Again, the taxes are not eliminated but they are delayed, potentially for many years. This means your money can keep working for you, and the compounding effect can be huge.

How does a transaction qualify for 1031 Exchange?

The IRS details a number of requirements for a transaction to qualify for 1031 Exchange treatment. Below are some of those details.

Who Qualifies for a 1031 Exchange?

Owners of investment and business property may qualify for a Section 1031 deferral, and such owners may be individuals, C corporations, S corporations, partnerships (general or limited), limited liability companies, trusts and any other taxpaying entity.

What are the different structures of a Section 1031 Exchange?

The simplest form is where there is an actual swap of property. The more complex, and common, form involves a deferred exchange where you can dispose of one property and subsequently acquire one or more ‘replacement properties’.

What types of property qualify?

The IRS details a number of conditions here, but the highlights include:

• Both properties must be held for use in trade or business or for investment (thus, personal residences are not eligible)

• Both properties must be similar enough to be considered ‘like-kind’. The IRS defines like-kind as of the same nature, character or class. Quality or grade does not matter. Most real-estate will be like-kind to other real-estate, but with some limitations.

• Excluded are assets such as inventory, stocks and bonds and certificates of trust.

What are the time restrictions?

There are two main time limits involved with a 1031 Exchange:

• You must identify potential replacement properties within 45 days of the sale of the first property. There are guidelines for how this identification must take place.

• The replacement property must be received and the exchange completed within 180 days of the sale of the relinquished property OR within 180 days of the due date (with extensions) of the income tax return for the year the first property was sold – whichever is earlier.

There are other important guidelines, such as when a qualified intermediary is needed to hold the proceeds from the sale while awaiting the purchase, plus how the basis is calculated on the property being acquired. As mentioned earlier, we’d recommend having accounting and legal assistance when pursuing a 1031 Exchange.