What is a 1031 Real Estate Exchange?

Capital Gain Tax Information

Under normal circumstances, when you sell a property you have to pay tax on the gain. Gain is caused by taking depreciation deductions for tax purposes or by the property appreciating in value during its ownership.

A Section 1031 tax deferred exchange, named for the Internal Revenue Code Section it refers to (also known as a Starker Exchange, Tax Free Exchange, or Like-Kind exchange), allows an exception to the real estate capital gains tax. When you sell your business or investment real estate, replace it with a different business or investment property, and complete an exchange, you can defer payment of the capital gains tax normally required on these sales. You can also avoid capital gains tax on rental property capital gains tax.

If your plans include using the money from the sale of a business or investment property to buy more of the same, a 1031 real estate exchange provides greater proceeds for your next investment-more than you could gain through the re-investment of after-tax proceeds.

A 1031 and the Capital Gain tax rule is not a tax loophole. It is a section of the Internal Revenue Code, written by Congress, to allow anyone who meets all the requirements to sell their property and defer paying taxes on the gain.

Understanding the Capital Gains Tax Rule and Avoiding the Capital Gains Tax

All relinquished (old) and replacement (new) property must be vacant land, rental property or property used for trade, business or investment. The property must be held for at least a year and a day to qualify for a 1031 Exchange. If the properties meet these requirements, you may exchange any real estate for any other type of real estate.

• You cannot have actual or constructive control of any of the proceeds received from the sale of the old property. By law, all money is held by a Qualified Intermediary (also referred to as an Accommodator or Facilitator). You cannot have an associate or employee, your attorney, broker or CPA hold the proceeds, nor can you leave the proceeds in escrow until the second property is purchased.
• You have 45 days from the date of closing on the old property to identify a list of properties, from which you will purchase the new property.
• From the date of closing, you have 180 days to close on one or more of the properties from your 45-day list.
• The titleholder on the old property must be the same titleholder on the new property.
• You must reinvest all cash proceeds from the sale, and purchase a new property or properties of equal or greater value, in order to avoid taxation on the gains.

Keep it simple. Allow an IXG consultant to handle all of the exchange details for you.

How to Begin a 1031 Exchange

Five Steps to a Tax Deferred Real Estate Exchange

Step 1: Contact an Investment Exchange Group 1031 expert immediately upon deciding to do a tax deferred real estate exchange. Our CPA and 1031 Exchange attorneys will ensure proper document preparation and coordination of all parties, including your real estate agent, and your title company.

Step 2: Discuss the IRS Code Section 1031 with your legal counsel, CPA, or tax advisor prior to beginning a tax deferred real estate exchange.

Step 3: Make sure that the real estate contracts for your 1031 tax exchange have the IRS Code Section 1031 terminology in the contract that allows for the assignment & indicates your intent to do an exchange.

Sample Terminology for Real Estate Contracts (Taxpayer should consult their tax advisor or real estate professional as this is suggested language only):

"Both the Seller and the Buyer hereto agree to cooperate with each other in a manner necessary to enable either party to qualify for a 1031 tax exchange at no additional cost or liability to either party. Either party's rights and obligations will be assigned to Investment Exchange Group to facilitate such exchange."

Step 4: New property for a 1031 tax exchange must be identified within 45 days of the closing of the old property involved with the 1031 tax exchange.

Step 5: Acquisition of the new 1031 Exchange property must be completed within 180 days of the closing of the old property.

1031 Tax Free Strategies

When it comes to finding a qualified firm to handle your 1031 tax exchange, experience, security and service should be paramount in your search. 1031 Tax Free Strategies is a nation-wide Qualified Intermediary (QI) specializing in 1031 real estate exchange, including complex reverse, construction and personal property exchanges.