1031 EXCHANGE INFORMATION

WHAT IS A 1031 EXCHANGE?

Most people who sell real estate must pay capital gains tax. This tax can range from 20% to 50% of one’s gain. There is a way to defer this tax payment…through a section 1031 exchange. This involves selling business or investment real estate and replacing it with other qualified real estate. Doing this will defer your tax and free up more money for investing in the new replacement real estate. If you have taken depreciation deductions for the property you are selling, you will also owe a percentage of those deductions along with the capital gains tax. A 1031 exchange will defer this “depreciation recapture” as well.

WHEN CAN I BENEFIT FROM A 1031 EXCHANGE?

Some examples of when a 1031 exchange can help you:

• Replace non-productive bare land with cash flow rich commercial property
• Exchange property for bare land on which an income generating building can be constructed
• Ease management burdens by exchanging multiple properties for one property
• Reduce a large one time tax hit by replacing a large property with several small ones, allowing parcels to be sold at different times. This strategy can also spread out the risk of owning one large piece of property.

These are just a few examples of when a 1031 exchange can apply. Our team can help you identify these and other scenarios where this process can benefit you - contact us

WHAT TYPES OF PROPERTY QUALIFY FOR THIS BENEFIT?

Real estate held for business or investment purposes, such as:

• Commercial Sites

• Farmland

• Warehouses

• Apartment Buildings or Motels

• Rental houses (Single Family or Multi Family units)

• Vacation Homes, under certain circumstances

• Bare Land

WHAT DOES NOT QUALIFY?

• A principal residence

• Property acquired for resale purposes, such as bare land to be developed in to lots and then put up for sale

WHAT TYPES OF EXCHANGES TAKE PLACE UNDER SECTION 1031?

Any of the previously listed qualifying properties can be traded for one another, for example:

• Bare land for a duplex (or vise versa)

• Farmland for a motel

• Certain types of timber rights for a warehouse

• A duplex for a more valuable rental property (duplex, 4plex, etc.)

The point is, when the IRS says exchanges have to be from one investment property to another “like kind” property, it does not mean it has to be duplex for duplex. It basically means investment property for investment property. Because there are so many possible scenarios, we can help you determine the type of exchange to best fit your situation.

HOW LONG DO I HAVE TO REINVEST FUNDS FROM A 1031 EXCHANGE?

From the closing of the sale of your property, you have:

• 45 days from date of sale to identify the property to be purchased

• 180 days from the date of sale to purchase the new property

Please feel free to contact us to answer any of your 1031 Exchange questions.


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