What is a 1031 Exchange?
IRC Section 1031, a properly structured 1031 exchange allows an investor to sell an investment property, to reinvest the proceeds in a new investment property, and to defer all capital gain taxes.
IRC Section 1031 (a)(1) states:
“No gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment, if such real property is exchanged solely for real property of like-kind which is to be held either for productive use in a trade or business or for investment.”
Deferring taxes with a 1031 exchange can be profitable, but it doesn’t have to be difficult.
Reasons to Exchange
There are several reasons to exchange, such as:
- Defer Taxes: Federal, State & Depreciation Recapture
- Diversify or Consolidate a Real Estate Portfolio
- Increase Cash Flow
- Switch Property Types (Land, Industrial, Multi-Family, Office, Retail, Residential, Easements)
- Get Into Other Real Estate Markets (Exchange anywhere within the U.S. & Territories)
- Build & Preserve Wealth Set up Heirs for the Future (Estate Planning: Stepped Up Basis)
- Increase Purchasing Power
What are the Features of a 1031 Exchange?
- 180 Day Timeline
- The replacement property must be declared and acquired within 180 days of selling original property
- The replacement property must be declared and acquired within 180 days of selling original property
- 45-day identification period:
- With a 1031 exchange, you MUST identify potential replacement property within 45 days
- Must use a Qualified Intermediary (QI)
- To qualify for a 1031 Exchange, you must use a qualified intermediary (QI)
- Requires purchase of “like-kind” replacement property:
- The property that is purchased to replace the relinquished property MUST be like-kind property
What are the Dos and Don'ts of 1031 Exchanges?
If you have any questions regarding 1031 exchange guidelines, extensions, or any other exchange related matter please give Exclusive Financial Resources a call or schedule a 15-minute discussion here.
