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1031 Exchanges

By Daren Newman - Broadway Capital Group

Fixer-Upper Tips For 1031 Exchanges

What is a 1031 Exchange?

A 1031 tax exchange is a method created by the IRS (IRC 1031) allowing real estate investors (business owners too) to defer ALL capital gains taxes on the sale of investment property by reinvesting sale proceeds into a replacement property.

1031 exchanges are also referred to as Starker exchanges, tax deferred exchanges, like kind property exchange, tax free exchange and delayed exchanges.

Why 1031 Exchanges?

Real estate investors build wealth more quickly when reinvesting sale proceeds using 1031 exchange procedures.

Similar in concept to a 401K/IRA, the 1031 tax deferred exchange provides a vehicle to earn compounding returns on deferred capital gains taxes.

A few other advantages include the ability to: control more property, refinance tax free equity optimizing leverage, effectively shelter state capital gains, and indefinitely defer capital gains tax.

Misconceptions on Types of 1031 Property Exchanges

We encounter a common misconception daily about what qualifies as like-kind property which is a main reason people inadvertently pay capital gains taxes.

The confusion arises because people are often told they must buy the same TYPE of property. That is, if they sold an investment house - they must exchange into another investment house. This is NOT the case.

ALL REAL ESTATE IS LIKE-KIND PROPERTY, as long as it is held for investment purposes.

Your options are open. For example, an investor may sell an investment house to exchange into an investment office building, and vice versa.

You may exercise your tax free exchange options to transfer investment proceeds into ANY type as long as the property is for investment USE.

1031 Exchange Guidelines

These chronological steps for the process are the starting rules to know for the procedure. Following these requirements is the majority of the process.

1) Document 1031 exchange intent- include potential intent in contract language (an addendum can be added)

2) Sell property - tax deferred exchange clock starts

3) Proceeds from sale held in trust by unrelated 3rd party, 1031 exchange intermediary. Proceeds are never in your possession.

4) 45 days from above close - identify suitable like kind replacement property(s)

5) 180 days from above close - close on identified like kind replacement property(s)

As you begin searching for 1031 exchange real estate , to defer all capital gains taxes, it's a general requirement to replace debt and equity from your sale. A rule of thumb is to purchase real estate at least the same value of your sold property.

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