The 1031 tax deferred exchange is a powerful wealth building tool.

A 1031 exchange is simply a method by which a real property owner disposes of one property and acquires another without having to pay any capital gains tax on the transaction. In an ordinary sale transaction, the property owner is taxed on any gain realized by the sale of the property. In an exchange, the tax on the exchange may be deferred indefinitely.

1031 exchanges are authorized by Section 1031 of the Internal Revenue Code. Careful adherence to the requirements of Section 1031 is important in maintaining the tax-free status of the transaction. The sale of the relinquished property and the subsequent reinvestment in a replacement property can qualify as a trade or exchange by means of an exchange agreement and the services of a qualified intermediary or accommodator. An intermediary can guide you through the IRS's regulations. You should also consider having your accountant and/or attorney review any real estate transaction.

A 1031 Exchange is usually a three-way exchange of like-kind property in which an intermediary or accommodator is used to facilitate the transaction.   Like-kind replacement property, in this case,  means any improved or unimproved real estate held for income, investment or business use.  Unimproved real estate can be exchanged for improved real estate.  A 100% interest can be exchanged for an undivided percentage interest with multiple owners and vice-versa.  One property can be exchanged for two or more properties.   A personal residence, however, cannot be exchanged for an investment property.

Like-Kind Investment Real Estate Includes:

Commercial

Rental Home

Retail

Multifamily

Duplex

Land

There are four basic steps:
1. Seller arranges for the sale of property and includes exchange language in the contract.

2. At closing, sales proceeds go to an Intermediary/Accommodator for a 1031 Exchange.

3. Seller identifies up to 3 potential exchange properties within 45 days of the closing.

4. Seller completes the exchange within 180 days of closing.

In a 1031 transaction, these steps can occur simultaneously.  Preferably, before you sell your property you need to consider what type of replacement property will work best for you.

Some basic requirements of a 1031 Exchange might include:

       -  Purchase equal or greater in net sales price (value).

       -  Reinvest all of the net equity in the replacement property.

       -  Obtain equal or greater debt on the replacement property.

                Exception: A reduction in debt can be offset with additional cash, however, increasing debt cannot offset a reduction in equity.

There are more details, rules and strategies that you need to understand.  This is intended to be a brief explanation of the Delayed 1031 Exchange.  Section 1031 also covers Simultaneous Exchanges, Reverse Exchanges, Improvement Exchanges as well as Delayed Exchanges.  We encourage you to contact us for the free comprehensive 21-page guide.  We also encourage you to talk it over with your CPA and your accommodator.  If you dont have an accommodator we will be happy to give you some referrals.

 
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Phone: 714 848-3707