Frequently Asked Questions about 1031 Exchanges What is a 1031 Exchange? Under the Internal Revenue Code Section 1031, it states that no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of “Like-Kind” which is to be held either for productive use in a trade or business or for investment. You must reinvest all cash proceeds from the sale, and purchase a new property or properties of equal or greater value, in order to avoid taxation on the gains. What is the definition of "Like Kind?" As used in IRC 1031(a), the words “Like-Kind” have reference to the nature or character of the property and not to its grade or quality. One kind of class of property may not, under that section, be exchanged for property of a different kind or class. The fact that any real estate in involved is improved or unimproved is not material, for that fact relates only to the grade or quality of the property and not to its kind of class. In other words, an apartment complex can be exchanged for an office building… an office building can be exchange for an industrial facility… an office building to a raw piece of development land… - a piece of raw land can be exchanged for income producing property…
IRC Section 1031 provides for an extremely broad definition of what “Like-Kind” property, however, primary residences are not of “Like-Kind” to IRS 1031 property. How does a 1031 Exchange benefit me?
Tax Savings and Preserving Wealth! Under normal circumstances, when you sell a property you have to pay tax on the gain. Gain is caused by taking depreciation deductions for tax purposes or by the property appreciating in value during its ownership. If your plans include using the money from the sale of a business or investment property to buy more of the same, a 1031 Exchange provides greater proceeds for your next investment-more than you could gain through the re-investment of after-tax proceeds. Do I have to be a real estate investor to take advantage of a 1031 Exchange? No. Any building owner, who is selling a property (not primary residence) and would like to re-invest the proceeds into another property, is eligible for a 1031 exchange. Although this practice is much more prevalent on the west coast, it is not uncommon for companies who own their buildings and need to relocate into bigger facilities, (i.e. industrial, office, retail) to utilize a 1031 Exchange. However, the titleholder on the old property must be the same titleholder on the new property How long do I have to complete the IRC 1031 Exchange? You have 45 days from the date of closing on the old property to identify a list of properties, from which you will purchase the new property. From the date of closing, you have 180 days to close on one or more of the properties from your 45-day list. How Do I start my exchange? If you are selling a property, and wish to consider a 1031 Exchange, make sure that the real estate contracts have the 1031 terminology in the contract that allows for the assignment & indicates your intent to do an exchange. Your legal counsel can suggest proper language, however, below is a sample clause. “Both the Seller and the Buyer hereto agree to cooperate with each other in a manner necessary to enable either party to qualify for a IRC Section 1031 tax-deferred exchange at no additional cost or liability to either party. Either party’s rights and obligations will be assigned to Investment Exchange Group to facilitate such exchange.” Can I utilize the proceeds of the sale of my property while looking for an exchange property? No, absolutely not. This is one of the most critical components of a successful IRC 1031 Exchange. The codes states that the seller can not take actual or constructive receipt of any of the proceeds received from the sale of the old property. The seller must utilize a safe harbor where the proceeds must be held until the exchange property is purchased. The most common method of guaranteeing this safe harbor rule is the use of a Qualified Intermediary. What is a Qualified Intermediary? A Qualified Intermediary is a person or entity… 1.) who is not the taxpayer or any other disqualified person or entity as defined in the code. 2.) who enters into a written agreement with the taxpayer (the “exchange agreement”) and, as required by the exchange agreement, acquire the relinquished property from the taxpayer, transfers the relinquished property, acquire the replacement property, and transfers the replacement property to the taxpayer. You cannot have an associate or employee, your attorney, broker or CPA hold the proceeds, nor can you leave the proceeds in escrow until the second property is purchased. Connecticut Realty Group, LLC is not a Qualified Intermediary, and can suggest several professional organizations that specialize in this field. Looking to Us – For Your Las Vegas Leasing Needs! Las Vegas Retail Space for Lease, Las Vegas Shopping Center Space for Lease, Las Vegas Strip mall for Lease, Las Vegas Commercial Space for Lease, Las Vegas Retail Commercial for Lease, Las Vegas Restaurant Space for Lease, Las Vegas Ground Leasing , Las Vegas Pads for Lease, Las Vegas End Cap Space for lease. Henderson, Nv Retail Space for Lease, Henderson, Nv Shopping Center Space for Lease, Henderson, Nv Strip mall for Lease, Henderson, Nv Commercial Space for Lease, Henderson, Nv Retail Commercial for Lease, Henderson, Nv Restaurant Space for Lease, Henderson, Nv Ground Leasing , Henderson, Nv Pads for Lease, Henderson, Nv End Cap . Green Valley Retail Space for Lease, Green Valley Shopping Center Space for Lease, Green Valley Strip mall for Lease, Green Valley Commercial Space for Lease, Green Valley Retail Commercial for Lease, Green Valley Restaurant Space for Lease, Green Valley Ground Leasing , Green Valley Pads for Lease, Green Valley End Cap . Summerlin Retail Space for Lease, Summerlin Shopping Center Space for Lease, Summerlin Strip mall for Lease, Summerlin Commercial Space for Lease, Summerlin Retail Commercial for Lease, Summerlin Restaurant Space for Lease, Summerlin Ground Leasing , Summerlin Pads for Lease, Summerlin End Cap Space for lease. |
