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Is a 1031 Exchange the right choice for you?

Exchange Basics

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Why Exchange?

  • Improve Investment Performance 

  • Change Property Type

  • Change Property Tax

  • Consolidate

  • Diversify

  • Life transition

  • Relocate

  • Change Tenants

  • Change Management

  • Defer Maintenance

Four Requirements for  a 1031 Exchange

  1. A 1031 Transaction must involve a transfer of Real Property.

  2. That property must be held for a Qualified Purpose, either as an investment, or used in a trade or business.

  3. The Relinquished Property must be Like-Kind with the Replacement Property.

  4. The transaction must be an Exchange as distinguished from a sale with a new purchase.

There are two critical time requirements in a 1031 Exchange.  The first, is a 45-day identification period, when replacement properties must be Identified. The second deadline is that the 1031 Exchange must be complete within 180 Days.  

 

There is some confusion regarding what type of property qualifies for a Section 1031 tax deferred exchange.  Like-Kind Property includes ALL Eligible Real Property.

For example, a single-family rental can be exchanged for raw land, or apartments or a commercial building. In addition, properties can be exchanged anywhere within the United States.

Qualifying Real Property

  •  Single Family Homes

  •  Apartments

  •  Shopping centers

  •  Medical facilities

  •  Warehouses

  •  Terminal properties

  •  Factories

  •  Hotels

  •  Casinos

  •  Vacant land

  •  Oil, gas, mineral, water rights

  •  Leaseholds of 30+ years

Property Excluded from 1031 Treatment

  • Stocks, bonds or notes

  • Other securities, evidences of indebtedness or interest

  • Interests in a Partnership

  • Certificates of trust or beneficial interest  

  • Good Will

  • Inventory / Property held primarily for resale

  • Primary residences      

  • Equipment

  • Personal Property (Planes, Boats)

A 1031 exchange allows real estate investors to “trade” one investment property for another and defer capital gains taxes in the process.

 

It gets its name from Title 26, section 1031, of the Internal Revenue Code, which says:

No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment.

 

Important note: They’re not eliminating capital gains taxes, they’re only deferring them. If and when they sell their new investment property, they’ll have to pay those deferred gains