About 1031 Exchanges

  • What is a 1031 Exchange?

    A 1031 exchange, also known as a tax deferred exchange, like-kind exchange, tax free exchange or Starker exchange, is a way to defer payment of capital gains tax on the sale of real estate. The name "1031 exchange" comes from Section 1031 of the Treasury (Tax) Code which authorizes such exchanges. As the name implies, the seller cannot sell the property outright. To have a valid exchange, the property being sold must be exchanged for other purchased property through a specific process. That is where we come in.

    The process is actually quite simple. The exchanger sells a property then uses the funds from that sale to buy a property. A few specific rules must be followed during the exchange process.

    When completing an exchange, the tax code prohibits a seller from taking receipt of the proceeds funds upon the sale of their relinquished property. A Qualified Intermediary holds those funds and applies them to the exchanger's replacement property purchase. The intermediary also facilitates the transfer of the properties as required by the tax laws.

    Our office provides these services for exchanges as the Qualified Intermediary also known as the exchange accommodator.

    Our expertise is assisting with the exchange process including providing the paperwork to document the exchange properly and coordinating the necessary steps with the title closer.

  • More on 1031 Exchanges
    When a seller sells real estate there may be capital gains tax due on that sale. By exchanging, the seller is able to avoid payment of that tax and use what would otherwise be a tax liability as funds to invest in other property.

    Any taxpaying individual or entity can take advantage of exchanges including businesses, partnerships, LLC and corporations.

    When completing an exchange, both the property sold and the property purchased must be used "in a trade, business or for investment purposes." This terminology comes from the Tax Code and generally covers property that is commercial or investment property.

    There are strict time frames that must be followed to complete a valid 1031 exchange. The exchanger must identify their replacement property within 45 days after their relinquished property is sold and complete their exchange within 180 days or the due date of their tax return for the year in which the relinquished property is sold, whichever comes first. More information on the steps in a forward 1031 exchange can be found here.

    A typical 1031 exchange is called a forward exchange. During a forward exchange, the exchanger sells their relinquished property and then acquires the replacement property in that order. It is possible to complete a reverse 1031 exchange where the replacement property is "acquired" before the relinquished property is sold. The process for a reverse exchange is much more complex than a forward exchange. Here at Gain 1031 we are able to facilitate a reverse 1031 exchange.

    A 1031 exchange can also be completed on other property such as equipment and vehicles in addition to real estate. The property must have been used in a trade or business just like a real estate 1031 Exchange and the process is similar to a real estate exchange.

    We welcome any questions on exchanges that you might have. Please contact us.

     

 

When to Consider a 1031 Exchange: Two Questions to Ask

There are additional issues that can arise with any particular exchange. We are happy to assist with answering questions on your exchange.

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