A 1031 Tax Deferred Exchange of real estate refers to a type of transaction allowed by the IRS, which, when properly executed, allows the exchanger to defer capital gains tax on the sale of real estate which has experienced a gain in value. The amount of gain is the difference between the original acquisition price and the current selling price – plus any depreciation which has been taken.
1031 Tax-Deferred Exchanges are also commonly known as: 1031 Tax Exchanges, 1031 Like-Kind Exchanges, and 1031 Real Estate Exchanges.
The mechanics of a 1031 Tax Exchange consists of the sale of a property, (the Relinquished Property); with the proceeds of the sale being held by a Qualified Intermediary (the QI), who holds the funds until the seller directs the QI to purchase a new property (the Replacement Property).This mechanism allows for the deferral of the capital gains tax that would otherwise have to be paid after the sale of the Relinquished Property.
Replacement Properties in a 1031 real estate change can consist of almost any type of real estate, including vacant land, (but excepting personal residences); and may also consist of multiple properties. The 3-property rule allows for an exchange in to 3 separate properties – which can provide diversification.
Time Restrictions
IRS Code 1031 requires that the Replacement Property(s) be identified within 45 days of the sale of the Relinquished Property; and that the purchase of the Replacement Property occur within 180 days.
Exchanging Up
To accomplish a fully tax-deferred exchange the rule of thumb is: exchange even or up in value; and exchange even or up in equity and in debt.
1031 Exchange Companies and Professionals
Among the types of 1031 exchange companies that may be involved in a 1031 exchange of real estate are Qualified Intermediaries. Other firms and individuals that are often key participants in 1031 real estate exchanges are CPAs and attorneys.
Sourcenet Investment Services, LLC has a strong team of real estate professionals and financial advisors that can guide you through the process of a 1031 property exchange, including choosing a QI. By discussing the complete process with us, you will be able to weigh the possible benefits of a 1031 exchange.
We can also explain the possible benefits of a DST (Delaware Statutory Trust) property investment, which can be purchased as Replacement Properties, or as stand-alone cash investments.
To learn more about 1031 Tax Deferred Exchanges and DST investments, choose an option below.
