1031 Exchanges for Investment Real Estate

What is a 1031 Exchange?

1031 Exchanges are specifically structured transactions that join together the sale of an old property and the purchase of a new property for the purpose of deferring taxes. Exchanges are primarily used for buying and selling investment real estate, but they can also be used for personal property that is used in a business. Examples of qualifying property include bare land, rental property, commercial buildings and homes other than your primary residence.

How can a 1031 Exchange work for you? A 1031 Exchange can defer the capital gain taxes that are due when you sell property that has increased in value or been depreciated for tax purposes. These federal and state capital gain taxes can be costly.

Internal Revenue Code Section 1031 offers you some relief. It allows you to defer payment of capital gain tax by investing in a new qualified property.

An exchange can benefit you in several other ways. By deferring taxes, you have increased flexibility, leverage and buying power. Exchanges also allow you to change, diversify or consolidate your investments.

To reap the benefits of a 1031 Exchange, you have two main concerns; meeting IRS requirements and choosing a trustworthy Qualified Intermediary (QI).

The IRS Rules for Exchanges - You will need to follow six primary rules for your exchange to meet stringent IRS regulations:

Real Property Use

Both your old and new properties must qualify as investment or business use. If both properties pass this test, you can exchange nearly any type of real estate.

45 Day Identification Period

You have 45 days from the closing of your sale to list the properties you may want to buy. There are no exceptions to the deadline.

180 Day Exchange Period

From the sale closing date, you have 180 days to close on the purchase of one or more properties from the 45 day list. Again, there are no exceptions to this deadline.

Qualified Intermediary (QI)

The IRS mandates that you use a QI to prepare the legal documents for your exchange. Because the QI must be independent, it cannot be your friend, employee, broker, or even your accountant or attorney. The QI also holds your money, so that you do not have access to it.

Proper Title Holding

You must purchase and take title to your new property exactly as you held title to your old property.

Reinvestment Requirement

To defer all of your capital gain tax, you must buy a property equal or higher in value than the one you sold. Also, you must reinvest all of the cash proceeds from your sale.

Choosing a Qualified Intermediary - The regulations, court cases, and IRS rulings that apply to your exchange are ever-changing. Choosing a licensed Qualified Intermediary that understands these laws and carefully monitors new legal developments, will ensure your 1031 Exchange is done accurately.

1031 Exchanges are also available to Foreign Owners of US Properties. Foreign Owners must first obtain a IRS Tax Payer Identity Number (TIN). This may take up to two months to obtain. Before considering a 1031 Exchange and Listing your property For Sale, consult a Professional Accountant accustomed to working with Foreign Sellers. Sellers & Buyers Realty USA can recommend professional sources.

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