A 1031 EXCHANGE PROPERTY MAY BE A GOOD TAX DEFERMENT STRATEGY FOR YOU
1031 Exchange is a technique that thousands investment real estate owners take advantage of every year. The 1031 tax-deferred exchange is a technique that enables sellers of income property to defer paying capital gains taxes by acquiring a new, “like kind” investment property, of equal or greater value, with the sale proceeds.*
A 1031 Exchange transaction has been around for nearly 100 years. Under the 1984 Congressional Tax Reform Act, owners can sell an income property and defer capital gains tax and recapture of depreciation by identifying an exchange investment property within 45 days, and reinvesting the profits within 180 days of the close of escrow.
*https://www.irs.gov/businesses/small-businesses-self-employed/like-kind-exchanges-real-estate-tax-tips
A 1031 Exchange Requires Identifying “Like-Kind” Property
“Like-kind” property is any real property held for the productive use in a trade or business for investment purposes. An investor can sell a condo and purchase raw land as long as they are both reported to the IRS as investment property.
Important: Neither the relinquished property nor the replacement property can be the investor’s principal residence. Nor can it be a “second home” property.
A 1031 Exchange is an excellent strategy that enables investors to sell their property and unlock its appreciation, defer taxes, and reinvest their proceeds into another investment property, keeping their capital working for them.
-Adam Bryan, Founder, American 1031
1031 Exchange Do’s and Don’ts
DO advanced planning for the exchange. Talk to your accountant, attorney, broker, financial planner, lender and Qualified Intermediary prior to exchanging and possibly investing in a DST.
DO NOT miss your identification and exchange deadlines. Failure to identify within the 45 day identification period or failure to acquire replacement property within the 180 day exchange period will disqualify the entire exchange resulting in the sale of the down-leg property being fully taxable. Reputable Intermediaries will not act on back-dated or late identifications.
DO NOT try doing a 1031 exchange using your attorney or CPA to hold title or funds. IRS regulation requires a Qualified Intermediary to properly complete an exchange. Call us for the name of one that operates in your area.
DO attempt to sell before you purchase. Sometimes a replacement property is identified before a buyer is found for the relinquished property. If this situation occurs, a “reverse” exchange (buying before selling) may be necessary.
DO NOT dissolve partnerships or change the manner of holding title during the exchange. A change in a legal relationship with the property may jeopardize the exchange.
