1031 Exchange
Monday, June 27, 2022
The 1031 tax deferred exchange is a key strategy for real estate investors - big and small - that provides great flexibility and encourages investment growth. However, failing to remain in compliance with strict IRS timelines and rules will result in hefty capital gains taxes, greatly reducing profits. 
IRS Code 1031 allows investors to defer paying both Federal and State capital gains taxes and depreciation recapture when they sell a investment property and buy another investment property of "like kind" through an exchange transaction. Thus, investors can buy the property they want and build their wealth faster by utilizing the exchange process.
Timeframe: From the time of closing on their relinquished property, the investor has 45 days to nominate potential replacement properties and a total of 180 days from closing to acquire the replacement property.


Set up: The exchange must be set up prior to the closing of the investoršs relinquished property. The investor cannot have actual or constructive receipt of the funds. The investor or their agent should contact an Exchange Accommodator as soon as possible to begin setting up the exchange and also inform Escrow of their intention to complete a 1031 exchange.

Identification requirements: The investor must ID the replacement property prior to midnight on the 45th day. The investor normally nominates three potential properties of any value. Then, acquires one of these three properties within 180 days. Typically, a common address (unambiguous description) will suffice. It is also a good idea to have a pending offer. If the investor needs to identify more than three properties, then the combined values of all properties cannot exceed 200% of the relinquished property's value.

Values: In order for an investoršs exchange to be completely tax deferred, the value and equity of the replacement property should be equivalent to or higher than that of the relinquished property. Investors can decrease mortgage levels by bringing cash into the replacement property, but they cannot increase mortgage levels and take cash out of the transaction without a tax implication. If they take cash out or go down in value on their replacement, then they would pay taxes on a portion of the transaction.

Title: It is very important to review how title is held on the investoršs relinquished and replacement properties and consider potential financing requirements. The vesting needs to be consistent, in order to maintain the IRS "continuity of vesting" requirement.

Generally, if you exchange business or investment property solely for business or investment property of a like-kind, no gain or loss is recognized under Internal Revenue Code Section 1031. If, as part of the exchange, you also receive other (not like-kind) property or money, gain is recognized to the extent of the other property and money received, but a loss is not recognized.   Please go to the IRS official website www.irs.gov/businesses/small/industries/article/0,,id=98491,00.html to find more details about it.