1031 Exchanges

A 1031 exchange is a transaction which allows an owner to sell highly appreciated real estate and buy another without tax consequence. It is the most effective strategy to defer taxes on capital gains and depreciation recapture which typically arise from the sale of investment property. Since 1921, the tax code has allowed that real estate held for investment or productive use in a trade or business may be exchanged for any other real estate that is held for investment or productive use in a trade or business. An apartment building may be exchanged for an office, office for retail, raw land for industrial, etc.

Real estate owners can achieve many objectives with 1031 exchanges which may include: deferral of capital gains and depreciation recapture; potentially improved cash flow and appreciation; diversification; and the ability to trade up to a higher quality investment.

Four Basic Steps To A 1031 Exchange:

1. The exchanger arranges for the sale of their property (the relinquished property) and includes exchange language within the purchase/sale contract.
2. At closing, proceeds from the sale go to a Qualified Intermediary where the funds are held in escrow.
3. The exchanger identifies “like kind” replacement properties within 45 days of the closing on their relinquished property.
4. The exchanger completes the 1031 exchange by closing on the replacement property or properties within 180 days of the closing on the relinquished property or the due date of the exchanger's tax return.