Dentists who own commercial property who are looking to relocate to a new area or larger building may be interested in learning about tax advantages that can defer income tax on the sale of their property. If you fall into this category, then you’ll be excited to learn more about the 1031 exchange. Code Section 1031 allows you to sell a piece of property, reinvest the proceeds into a new property and defer the income tax from the sale.
WHAT IS A 1031 EXCHANGE?
Investment, rental, vacant land or realty used in a trade or business can be sold and the funds applied toward the purchase of a similar property within 180 days of sale, without incurring any income tax consequences. The purchased property must be of an equal or higher value, there must not be any cash received and there can be no debt relief to avoid the income tax. The 1031 exchange provides incentive for a practice owner to move their business to a larger facility as the business grows without being hindered by income tax.
- A seller must use an intermediary to handle the buying and selling transactions. We recommend working with a reputable and knowledgeable intermediary as you, the seller, won’t actually touch any money.
- A 1031 exchange is only applicable for investment or business property, not personal use property.
- The property owner has 45 calendar days, post‐closing of the relinquished property, to identify in writing and deliver to the seller/intermediary up to three potential replacement properties of like‐kind.
- The intermediary on the seller’s behalf must purchase all replacement properties within 180 calendar days following the closing sale of the relinquished property–or the due date with extensions of the income tax return for the tax year in which the relinquished property was sold–whichever is earlier.
- Remember, it is always wise to consult a qualified tax professional to guide you through the complex rules and requirements associated with this type of transaction.
THE FOUR TYPES OF 1031 EXCHANGES:
- Simultaneous: A simultaneous exchange allows investors to relinquish and close on a replacement property in the same day.
- Delayed: A delayed exchange is the most common option. It allows investors to sell their investment property first and find a replacement property within a certain amount of time after selling.
- Reverse: In a reverse exchange, you buy first and pay later. This type of exchange is challenging because it must be an all cash purchase and most banks won’t lend to you in these circumstances.
- Construction/improvement: In this type of exchange, there are a lot of investors that sell a property and then realize the one they want to buy costs less than the one relinquished. This type of exchange allows you to use the remaining funds to build or improve on the property you want to buy. This exchange can be helpful if you are buying a space that was not previously a dental office, for example.
If you own your commercial real estate and you are ready to buy a larger building or move to a new location, you may want to consider a 1031 exchange. Please reach out to our dental lending team with questions about expanding your practice, and if you are interested in a 1031 exchange, make sure you discuss your plans with a qualified tax professional, as well.