"...any type of U.S. real property

interest held by a client for

productive use in a trade or

business, or for investment

purposes can be exchanged for

another real property interest..."

 

 

What is a 1031 Tax Exchange?

 

The answer is quite simple: one of the most sophisticated tools available to knowledgeable investors buying and selling real estate.

 

Sell a stock at a profit, and what do you get? A bill from Uncle Sam for the tax on your capital gains. But sell that same stock for the very same profit in your 401(k), and what happens to your tax bill? Uncle Sam postpones it. If you are comfy with this concept, then you have grasped the core of a 1031 Exchange: a method to defer capitol gains tax on the sale of a property by investing the proceeds in like-kind property as detailed in Section 1031 of the Internal Revenue Code.

 

What is Like-Kind property?

All real estate in the U.S. is considered to be like-kind as long as each property qualifies for the proper use. Mineral interests, a rental house, perpetual water rights, and hunting land can all be considered like-kind, as long as they are being held for investment.

 

These are just a few of the many specifics associated with a 1031 Exchange. Above all, remember these two words: Qualified Intermediary. This term applied to the independent party that actually facilitates the tax deferred exchange. Anyone completing a 1031 Exchange relies on a Qualified Intermediary to explain the different types of exchange ? simultaneous, delayed, built to suit, reverse and personal property, as well as the requirements for a valid exchange and the specific time restrictions involved.

 

Are you the sort that likes to save a dollar and do your own taxes? That won´t work with a 1031 Exchange. The Qualified Intermediary acts as a safe harbor for the funds and protects the investor from taxable consequences. The instant a taxpayer receives the proceeds from the sale of a property, any notion of a 1031 Exchange evaporates. Using that earlier comparison of trading stocks, it is now a transaction done outside the protective shield of your 401(k).

 

What Kind of Exchanges Are There?

 

Investors have the ability to structure their exchanges in several ways. Depending on the investor's situation any of the four exchange types listed below could be a viable option:

 

Simultaneous Exchange

In a simultaneous exchange the relinquished property is sold and the replacement property acquired on the same day, with concurrent closings. The simultaneous exchange is rare and investors should still use an Exchange Accommodator when doing a simultaneous exchange.

 

Delayed Exchange

The most common method of exchanging, the delayed exchange, allows investors to sell a property and then acquire replacement property within 180 days.

 

Reverse Exchange

The reverse exchange allows investors to acquire replacement property prior to selling. The reverse exchange can be more complicated however, as investors can not own both the new replacement property and (soon to be) relinquished property at the same time. Asset Exchange Company, as an Exchange Accommodating Titleholder will need to go on title to one of the two properties involved in the exchange. Investors considering a reverse exchange should contact Asset Exchange Company well in advance (2 weeks) of closing on the replacement property.

 

Construction/Improvement Exchange

The construction exchange allows investors to use exchange proceeds to build on land or improve an existing property. The construction/improvements exchange is often used to acquire a 'fixer' and do improvements on the existing structure. The pitfall with a construction/improvement exchange lies in the fact that all exchange funds need to be spent on or before the 180th day of the exchange.