04 Mar 1031 Exchange Basics
1031 Exchange Basics:
We find that as real estate appreciates, more of our many business owner and real estate investor clients take advantage of section 1031 exchanges (aka “1031 like kind exchanges”) that can provide significant tax benefits to commercial and investment property owners. Through a 1031 exchange, an investor can defer recognition of taxable gain, by reinvesting in like-kind or similar property within certain time limitations and other restrictions. A 1031 exchange is an extremely flexible investment tool for almost every type of real estate investment. Below are a just some of the basic rules when navigating a 1031 exchange. However, it is important to contact tax professionals, like our tax team, that have many years of experience in guiding clients through the tax related complications of 1031 exchanges.
1. Investment or productive use. The properties exchanged must be held for investment purposes or used in your trade or business. An “investment property” is the passive long-term holding of property, with the expectation of its appreciating in value. Property that does not qualify for a 1031 exchange includes a personal residence, second home or vacation home, inventory property, partnership interests, bonds, notes or stock, stock-in-trade or other securities or evidences of indebtedness or interest.
2. Like-kind exchange. To be “like-kind,” the replacement property must be of a similar nature or character to the relinquished property and must be held for productive use in a trade or business or for investment purposes. Examples of like-kind exchanges include a commercial office project for a farm or ranch, a shopping center for an office building, and raw land for a hotel.
3. Exchange does not have to be “simultaneous.” An exchange can be simultaneous (i.e., simultaneous swap) or non-simultaneous (i.e. deferred or “Starker Tax Deferred Exchange”). For a non-simultaneous exchange, the taxpayer generally uses a qualified intermediary or exchange facilitator who holds the proceeds of the sale, prepares all legal documents and facilitates the transaction. It is crucial to identify the replacement property at exactly 45 days from the date of the relinquished property’s sale. Likewise, the seller/commercial investor must acquire the replacement property within 180 days of the sale of the relinquished property. These time limitations are generally not extendable by the IRS and must be followed.
4. Title taken in same name. The title on the replacement property should be the same as was on the relinquished property. For example, if an LLC was on the title of the relinquished property, it must be on the title of the replacement property.
This information is current as of 3/2014. This article is for general information only. Please consult our tax department, or another qualified tax advisor before doing a 1031 exchange.