1031 Exchanges

What is a 1031 Exchange? 

A 1031 Exchange is derived from Section 1031 of the IRS code which allows property owners to sell a real estate investment property and defer any taxes that may be owed by purchasing a new investment property of equal or greater value.  

A 1031 exchange may also be referred to as a “like-kind” exchange or a Starker; it can be explained as a swap from one investment property for another.

If used correctly, there is no limit on how frequently a 1031 exchange may be done. For decades, 1031 exchanges have been an effective wealth–building tool for real estate investors across the country. 

How to Utilize a 1031 Exchange

To use a 1031 exchange effectively, you must exchange one property for another property of similar value. As an example, if you have a property you want to sell without recapturing the depreciation or paying capital gains tax, you can sell the property through a 1031 exchange.

The proceeds from the property you are selling, or the relinquished property, will be moved into an exchange account. The profits will be held for 45 days from the sale of the relinquished property in order to identify the replacement property.   

Once the replacement property has been identified, you will be required to close on the property within 180 days of the closing date of the relinquished property.  

By continuing to “swap” into new investments, the owner can continue to defer taxes until death. At death, the property owner‘s beneficiaries will receive a step–up in basis which means they will likely pay little or no taxes once they sell the property.  

1031 Exchange Rules  

1. To qualify for a 1031 exchange, an investor must follow several rules:
2. The property that is being sold and the property being acquired must be “like-kind”. In a broad sense, a like-kind property means that both the relinquished and the replacement property must be of the same nature or character. An example would be the exchange of an apartment building for a duplex, or a rental property for a vacation rental. 
3.  A 1031 exchange does not apply to personal property and is to be used for investment or business properties. You are not able to use a 1031 exchange to swap a primary residence for another. 
4.  In order to avoid the taxes on the sale of the replacement property, it must be of equal or greater value than the relinquished property. 
5.  The seller is not allowed to take receipt of any funds from the sale of the property. They must use a qualified intermediary who will receive the funds from the sale and hold it in an escrow account until the seller purchases a new property. 
6.  The same name must be reflected on the titles of both property tax returns (the relinquished property and the replacement property).
7.  Upon the sale of the property, the seller will have 45 days to identify the potential replacement property. Once identified, the seller must transact on one of the properties they identified. The seller then has 180 days from the time of the relinquished property sale to complete the replacement property sale.  

When to Use a 1031 Exchange Fund 

As property owners near retirement, many would like to simplify their life and rid themselves of the duties required in managing a property. For them, a 1031 exchange fund may be the right solution.  

A 1031 exchange fund allows a real estate sponsor to create a property as part of a Delaware Statutory Trust. The Sponsor buys and manages one or more properties, then structures the investment such that a property owner can sell an existing property, using a 1031 exchange fund and receive an income. Through this, the property owner will be able to continue to defer taxes and receive an income but will leave the management up to the sponsor.   

Ready to See How You Can Benefit From a 1031 Exchange?

Business Design can help you navigate through the strategies of utilizing a 1031 exchange with experienced advice and access to critical resources. With our guidance and expertise, we will create a comprehensive and fully coordinated plan specifically designed for you and your needs. 

Sign up to find out more about 1031 exchanges and view our available resources for completing “hands-free” 1031 exchanges.