1031 Exchanges

Doing a 1031 exchange gives sellers the opportunity to defer 100% of the Federal and State capital gains taxes associated with the sale of property. How does an exchange work? Put simply, the proceeds received from the sale of a property are rolled-over to purchase one or more other properties of equal or greater value. The seller saves taxes.

Why Exchange?

In an exchange, all proceeds from the sale of property are available to purchase other property. This is like getting an interest free loan on the tax dollars that would have been due for a cash sale. The tax savings allows you to retain equity and move into properties of higher value each time they perform an exchange.

“In a like-kind exchange, both the property you give up and the property you receive must be held by you for investment or for productive use in your trade or business”. IRS

What’s Eligible?

Exchanges apply to property held for investment purposes, not to the sale of a personal residence.

The IRS states that exchanged properties must be “like kind”. This means real property for real property, not necessarily land for land or house for another house. For example, it’s fine to exchange a piece of land for an apartment complex, or property in the city for farm land. Read the IRS rules for specific information about what types of properties qualify for “like kind”.

Here are a few more exchanging basics;

The sale of a single property does not limit the seller from exchanging into multiple properties. The reverse is also true; the seller can relinquish several properties in order to purchase a single property.

Sometimes sellers do not use all proceeds to purchase the new property. The unused portion is considered a cash sale, and is taxed.

The incoming and outgoing funds involved in an exchange flow through the hands of a Qualified Intermediary, also called a Facilitator.

“A qualified intermediary is a person who enters into a written exchange agreement with you to acquire and transfer the property you give up and to acquire the replacement property you give up and to acquire the replacement property and transfer it to you. This agreement must expressly limit your rights to receive, pledge, borrow, or otherwise obtain the benefits of money or other property held by the qualified intermediary.” IRS