1031 Exchange

Unlike a home owner who could be entitled to an exemption of capital gains, an investor who decides to sell, could be a result in serious capital gain tax consequences. Long-term capital gains and depreciation recapture can result in a larger percentage of taxable capital gains.

A “section 1031 exchange” allows a real property investor to lock in their gains in real estate and shift into other investments without the accompanying tax payment to the Internal Revenue Service (IRS) and the possibly the state. A “Section 1031 Exchange” is simply referred to as a 1031 Exchange based on section 1031 of the IRS tax code.

With our experience with 1031 Exchanges,we can provide you with a 1031 exchange perspective from knowledgable Real Estate advisors about the exchange process. Below you can learn more about the qualifiying requirements for "Like Kind" replacement properties as well as the stringent time requirements assocaited with the transaction.

Qualifying Properties

A 1031 exchange is a method for you to sell your property and reinvest the proceeds into other properties without the burden of paying taxes. The 1031 echange allows you to postpone paying tax on any gain after depreciation recapture is considered. This is provided only when the investment property being relinquished has appreciated in value.

If, as part of the exchange, you also receive other (not like-kind) property or money, a taxable gain is recognized. This means the relinquished property and the replacement property, must be similar in nature, classification or characteristic. Generally, real property can be exchanged for other types of real property (e.g. a house for a condo unit, apartment biulding or commercial space). However, real property in the must be located in the United States. Real property outside the United States are not like-kind properties.

Time Requirements

THERE ARE two time frames that affect 1031 exchanges: the exchange period and the identification period.

  • The exchange period is 180 days, starting at the closing sales date of the relinquished property. During this time the entire exchange must be completed to qualify for tax deferral.
  • Also starting at the closing date of the sale of the relinquished property, is the identification period which is 45 days to identify in writing up to three properties to replace the relinquished property and complete the exchange.

If either time frame is not met, the exchange will be treated as a normal sales transaction and may be subject to taxes.

1031 Timeline

 

One important note is that 1031 exchanges are tax-deferred, not tax-free. When you acquire replacement property, you have the same basis in the new property as you did in the relinquished property. When you eventually sell the replacement property, you will pay tax on the capital gains and depreciation recapture that you originally postponed in the 1031 exchange. If you are considering an exchange, consult with your attorney and accountant.