What is a 1031 Exchange?

 

It is the IRS approved method that enables you to sell your real estate and avoid paying the capital gains taxes indefinitely, and sometimes permanently.  That’s the ‘cliff notes’ explanation. There are rules.  The property must be that which is held for investment purposes – this can be rental property, commercial property, unimproved land, or virtually any real estate that you have owned for at least 2 years with the purpose of investment.  When you sell one property, you must reinvest in another similar or “like kind” property or properties, deferring all federal (and most state) capital gains taxes.  

The technical explanation is more like this: IRC § 1031 allows the deferment of capital gains tax, which would otherwise be owed on the sale of property, which has been held as an investment or used in a trade or business.  Rather than paying taxes upon the sale of appreciated real property, IRC § 1031 enables the full reinvestment of the investor’s sale proceeds.  The amount not paid in capital gains tax to federal and state governments remains as equity in your investment.  Tax deferment, therefore, increases the amount of your money, which can be invested into replacement property(s) of equal or greater value.  The real property that is sold is called the “relinquished property” and the real property which is acquired through the exchange is called the “replacement property.”   

There are technical rules, which must be satisfied.  For example, although the replacement property does not have to be identical, it has to be “like kind” as compared to the relinquished property.  Like kind is replacement property which is held for investment, income, or productive use in a trade or business, and not primarily for sale or held as inventory.  Also, a qualified intermediary must receive and hold the cash proceeds from the sale of the relinquished property. 

The replacement property, or properties must be identified within 45 days, and escrow must close 180 days from the date escrow closes on the relinquished property.  This transaction is authorized by 1031 exchange rules and is one of the best options for investors to rollover their investment commercial properties while preserving as much wealth as possible. 1031 exchanges structured as tenants in common provide commercial property investors a range of opportunities to meet personal investment objectives. 

Contact us today if you are interested in rolling over a commercial property investment through a 1031 exchange.

 

(209) 753-7222   or email michelle@michelleyoungfinancial.com for more info