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1031 Exchange By know you may have already heard of the term 1031 Exchange, although you may still not fully understand the meaning & how can it benefit you. However, with so many of you making investments in rental properties, commercial buildings, land, apartment complexes, etc., it is definitely something to consider. 1031 also knows as like-kind exchanges. 1031 Exchanges allow an investor to defer capital gains taxes if he/she sells a big asset, such as land or rental property, and invests the proceeds immediately in a similar asset. Although 1031 Exchanges can apply to many types of exchanges, they are most often used for real estate. What is the advantage? The investor can delay tax consequences when upgrading the investment property he/she owns. The 1031 Exchange (term named for their place in the US Tax Code) were created in 1920s for businesses & large investors who owned many assets & wanted a way to defer taxes over the long term. Until a few years ago, those groups were still the main customers for 1031 transactions but skyrocketing real estate values have made 1031 Exchanges a popular alternative for investors of all sizes. However, these transactions are so complicated that investors almost always rely on tax advisors, real estate agents & other intermediaries to facilitate each deal. The first thing one must understand is that 1031 Exchanges have strict time frames for buying & selling real estate if the exchange is not simultaneous, so it is important to find a Real Estate Agent & Tax Advisor that has experience in dealing with these complex transactions. The easiest way to describe a forward 1031 exchange is as follows: A person with a property identifies property(s) of like-kind value for exchange. Luckily the IRS's definition of the term like-kind is flexible & the property does not have identical or with the same usage. In fact a Warehouse could be exchanged for a strip mall or even undeveloped land. Under the basic guidelines of 1031 Exchanges, investors have 45 days to identify up to 3 properties of equal or greater value that they plan to exchange for the old one & a total of 180 days to close on the property. 1031 Exchanges transactions require the involvement of a 3 rd party intermediary most often a Real Estate Agent to hold the money while the exchange is done so the tax advantage does not evaporate. A reverse exchange allows the replacement property to be purchased & closed on before the relinquished property is sold. Usually an Intermediary takes title to the replacement property & holds title until the taxpayer can find a Buyer for his /her relinquished property & close on the sale under an Exchange Agreement with the Intermediary. Subsequent to the closing of the relinquished property (or simultaneous with this closing), the Intermediary conveys title to the replacement property to the taxpayer. The types of property that do not qualify for 1031 Exchange are personal residences, land under current development; construction or fix/flips for resale; property purchased for resale; inventory property; corporation common stock, bonds, notes & partnership interests. For information on finding qualifying properties for
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