Brad's Real Estate Blog

May 11th, 2007 7:00 AM

What is a 1031 Exchange?

A 1031 Exchange accomplished two positive economic outcomes for the property owner:

  1. Deferral of capital gains taxes that would normally be due upon sale.
  2. Preservation of equity.

A properly structured exchange allows an investor to sell a property, to reinvest the proceeds in a new property and to defer all capital gain taxes. IRC §1031 (a)(1) states:

  

"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."

1031 Exchange Information - If you are ready to make the next step as a real estate investor, using a 1031 tax-deferred exchange could be the best choice you will ever make. We have extensive 1031 Exchange experience and look forward to assisting you with your next investment purchase.

  • Two requirements must be met to defer the capital gain tax: (a) the Exchanger must acquire "like kind" replacement property and (b) the Exchanger cannot receive cash or other benefits (unless the Exchanger pays capital gain taxes on this money).
  • By completing an exchange, the exchanger can dispose of their investment property, use all of the equity to acquire replacement investment property, defer the capital gain tax that would ordinarily be paid, and leverage all of their equity into the replacement property.

 

Eligibility for a 1031 Exchange - Eligibility for a 1031 exchange is determined by the nature of the properties involved, not the status of the taxpayer. The property must be held for investment or productive use in trade or business, and exchanged for like-kind property.

Please call 520.227.6694 Brad Snyder to set-up a free 1031 Exchange consultation.

1031 Exchange Basics        

The rules for a 1031 Exchange are complex. This is a basic overview with the understanding that each transaction is different. When assembling your 1031 Exchange team, a CPA is a must to ensure your individual situation is accurately addressed. That being said, the basic rules are always the same. 

  1. Only investment properties qualify for 1031 exchanges, not personal residences.
  2. You have 45 days from the date of transfer of the relinquished property to identify replacement property. No exceptions. 
  3.  The exchange must be completed within 180 days or the tax due date. For this reason, exchanges initiated after October 15 require exceptional vigilance. 

 Once you have decided to sell a qualified property, contact your CPA and a REALTOR with 1031 Exchange experience. Both are vital to a successful transaction. The CPA will be able to advise you of your current financial situation and help you chart a path for the future. The REALTOR will be able to assist you with the proper documentation and guide you through the steps involved. He or She can also help you select a 1031 Exchange Qualified Intermediary (QI).   Replacement PropertyThere are no limits on the value or number of properties that may be relinquished in an exchange.

There are limitations on how many replacement properties may be identified. One of the following three rules must be adhered to.   

Three Property Rule 

         A maximum of three properties may be identified without regard to the fair market value (FVM) of the replacement properties. 

200 Percent Rule 

         Any number of properties may be identified as long as the aggregate value does not exceed 200% of the relinquished property. 

95 Percent Rule 

         Any number of properties may be identified if, by the end of the exchange period (180 days), the aggregate market value of acquired property is at least 95% of the aggregate market value of all properties identified.  

Properties for replacement must be identified in writing on or before the end of the 45 day identification period.  I will discuss more about documenting your exchange and holding periods in the next post. 

Posted by Brad Snyder on May 11th, 2007 7:00 AM
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