1031 Exchange – Tax Deferred Exchange

A 1031 or tax deferred exchange is when an investment or income producing property is sold by the owner and trades to one or multiple new investment or income producing properties at equal to or more than the value of the sold property. This process allows the property investor to defer paying federal and state income taxes on any gains, within the exchange, until later in the future. This is a an attractive investment strategy for anyone that invests or owns commercial real estate.

 

1031 Exchange Benefit

The diagram shows the benefit of using a tax deferred exchange. In this situation, the owner is able benefit an extra $105,000 now to reinvest all the capital gains from his previous sale into a new real estate investment

 

Timeline and Process

  • Identify if the property is a Qualified Property for a 1031 Exchange
  • A detailed  Exchange Agreement is drafted and sent to a chosen Qualified Intermediary
  • The relinquished property is sold and ALL funds are transferred to the Qualified Intermediary, the investor never touches the proceeds
  • On the day of closing, a 45 day identification period begins
    • Identify up to three new replacement properties for investment, like-kind investment
      • Must be more or equal value of sold relinquished property to get full deferral
      • Can be multiple properties that are more or equal value to the relinquished property
  • On the day of closing, 180 day purchase period also begins
    • The 45 identification period is within the 180 day purchase period, not an addition to
    • The property investor must purchase and close on the replacement property by 180th day
  • All proceeds from the relinquished property must be used to buy the replacement property
    • The Qualified Intermediary will transfer the funds to the replacement property seller
  • The property investor will then receive the replacement properties, deferring the taxes until later in the future

 

Rules

  • Used only for Income producing, investment, or business use property
  • Must use a Qualified Intermediary
  • The investor must take title to replacement property that is like kind to the relinquished property
  • Reinvest all proceeds from the sale of the relinquished property into a replacement property that is equal or higher in value than the relinquished property

 

There are certainly many advantages to using a tax deferred exchange, the primary benefit can best be described as trading up with real estate  without paying immediate taxes, allowing the investor or owner additional capital for their next investment.

Single tenant, also known as “NNN” or Triple Net” deals, are often a favorite property type for 1031 investors, but an investor can certainly do an exchange for shopping centers, office buildings, industrial buildings, and apartment complexes. The 1031 exchange it’s a very important strategy used by knowledgeable investors in the Naples and Southwest Florida area as those investors are often selling properties in the North when they have a low cost basis and may otherwise have to pay the IRS very sizable capital gain taxes.

Each 1031 scenario is different and falls under different rules, we encourage you to contact us for more information for your specific property and exchange.

1031 Exchange – Tax Deferred Exchange August 28, 2013
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