Why do a 1031 Exchange?
In simple terms, a 1031 Exchange is a swap of one investment property for another investment property; in other words, you can sell one investment property and use the proceeds to purchase another like-kind investment property without a tax consequence. This is an extremely valuable tool used by real estate investors to grow their investments while deferring capital gains taxes. The exchange allows you to keep your equity working, rather than losing about one-third of it to taxes.
Who can do a 1031 Exchange?
To qualify for a 1031 Exchange, there must be an exchange of properties such that the seller is using the proceeds of one sale (the “relinquished” property) in order to purchase another property (the “replacement” property). The properties must be rental or investment properties used in your trade or business. Common examples are apartments buildings, commercial buildings, vacant lots, farm land, or sometimes a single-family home held for investment purposes. Typically residential properties of the owner do not qualify. Individuals, corporations, partnerships (general or limited), limited liability companies, trusts, and any other taxpaying entity may be eligible to qualify for a 1031 Exchange.
When must a 1031 Exchange be completed?
To complete a 1031 Exchange, the replacement property or properties must be identified within 45 calendar days of closing the sale of the relinquished property. The closing of the replacement property must be within 180 days from the closing of the relinquished property, and the replacement property must have greater or equal value of the first property to be fully tax-free. There are no extensions available for these deadlines, even if they fall on a major holiday!
What are the most common types of 1031 Exchange structures?
The most common type of 1031 Exchange that we see is a “delayed exchange” where an investor closes on one property, and then some time later (within the timelines above) closes on a new property, using the proceeds of the relinquished property. The proceeds from the relinquished property must be held by a third party intermediary or the exchange is not possible, so it is imperative that you consider an exchange prior to closing and receiving funds from the sale of your relinquished property. Involve your advisors early and often!
Other types of exchanges include simultaneous exchanges, reverse exchanges, and improvement exchanges. Contact us for more information about those options.
Where can you get help with your 1031 Exchange?
KS Law regularly works with investors to complete 1031 Exchanges. If you have questions, click here set up a complimentary consultation today!