What is a 1031 Exchange?

The Internal Revenue Code Section 1031 provides that no gain or loss will be recognized on the exchange of any type of business use or investment property for any other business use or investment property. 1031 Exchanges are not really an exchange in the context of two-party barter. They are typical sales and purchases that involve the same exact characteristics as any other sale or purchase, without capital gains. The only real difference is the investor is increasing his selling and buying power by electing to avoid the drain of taxes under Section 1031 regulations. No other aspects of the transaction are affected.

Who Should Consider a 1031 Exchange?

If you are considering selling a business use or investment property you should consider effecting a 1031 Exchange. This offers the educated investor an opportunity to reinvest the federal capital gains that would normally be handed over to the Internal Revenue Service. Essentially, 1031 Exchanges could be thought of as an interest free loan from the Internal Revenue Service; one in which the principal may be increased through subsequent exchanges and may never require repayment, if planed properly.

Common Misconceptions

1. There are many that think that properties must be "swapped". In the original code this was a requirement, but is rarely done presently. Now a 1031 Exchange will enable one to sell a property to another party totally unrelated to the party from whom they are purchasing the replacement.
2. Another misconception is that only investors in larger commercial properties are eligible for the benefits of Section 1031. 1031 Exchanges apply to all investment properties, large or small. A Corporation selling a large industrial park can benefit the same as an individual selling a home used as a rental property in a vacation area.
3. Some think that you must acquire property of "similar use or service". The term "like-kind" exchange is often used when describing 1031 exchanges. This applies to real property held for use as business or investment. As an example, raw land may be sold with a replacement property being an industrial park or rental apartment building. One property may be sold and three purchased as replacement. Basically, any real property used for business or investment will qualify.
4. 1031 exchanges are not as difficult as one may be lead to believe. If working with a qualified intermediary that specializes in Section 1031 tax deferred exchanges, the transaction will be very smooth. A qualified intermediary will keep you appraised of your time deadlines and ensure that all steps are done in compliance with the Internal Revenue Service regulations.

Benefits and Advantages: 

• Estate preservation
• Buying power increase due to greater cash flow
• Selling power increase due to the fact that federal capital gain tax liability is deferred.
• Possibility of increased income.
• Relocation possibilities for business or investment property
• Exchange for property that requires less management
• Consolidation of smaller properties into larger properties
• Business Expansion possibilities into a larger space.

If you're ready to complete a 1031 Exchange, or if you need more information about our services in this area, please contact us now!