1031 exchange
FAQ
What Is a 1031 Exchange?
A 1031 Exchange is a means of deferring capital gains taxes when selling investment property and purchasing like kind investment property.
What are the time periods?
The taxpayer must close the replacement property within 180 days from the close of escrow of the relinquished property or the tax return filing date of the relinquished property, whichever comes first. The first 45 days is when the taxpayer must identify the replacement they intend to purchase.
What is ‘like-kind’?
With real property, like-kind means investment property for investment property. You can exchange an apartment for vacant land. The replacement property does not have to be income producing, but it must be held for investment purposes. Personal property exchanges must be ‘similar-in-use.’ A plane must be exchanged for a plane, tractor for tractor.
How much do I need to buy?
You must reinvest all the net proceeds into the replacement property. Any cash not reinvest is taxable as ‘cash boot.’ Also, you must obtain equal or greater debt on the replacement property than was on the relinquished property. Any debt not replaced is taxable as ‘debt boot.’ And keep title the same from relinquished property to replacement property.
How do I identify?
You will need to submit in writing, your selections of replacement properties. You can identify up to three properties without regard to value or, 4 or more properties as long as the aggregate value of all the properties identified does not exceed 200% of your relinquished property.
Reasons to do a 1031 Tax Deferred Exchange
A 1031 Exchange may be used to accomplish many real estate investment goals. The most obvious benefit is the deferral of both Federal and State capital gain taxes and the recapture of depreciations. This allows the investor to invest all of the net proceeds from the relinquished property into their replacement property. Here are some reasons why you may want to consider a 1031 Tax Deferred Exchange.
To Exchange into a more valuable property which can increase the cash flow and may provide more depreciation, thus resulting in a higher return on your investment.
To diversify your real estate investments by exchanging into another city or state or property type, such as condo in New York for an office building in Sacramento.
To consolidate your real estate investments by exchanging several properties into one property, such as three single family rentals into one office building.
To lessen your management responsibilities by exchanging your self-managed properties into one professionally managed property, such as a self managed triplex for a managed retail center.
For estate planning purposes to diversify your real estate investments and designate the heirs to each of your properties. This will let each heir decide what they want to do with their property.