1031 Exchange

The Fast Facts You Need To Know About The 1031 Exchange

Many commercial property owners are interested to learn of tax advantages that can defer income tax on the sale of property. Intro the 1031 exchange. Code Section 1031 allows an investor to sell a 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 or like 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. This provides leverage for a pharmacy owner to move his or her business to a larger facility as the business grows, without being hindered by income tax.

 

FAST FACTS:

  • A seller must use an intermediary to handle the buying and selling transactions. A reputable and knowledgeable intermediary is highly recommended as the the seller doesn’t touch any money.
  • A 1031 exchange is only applicable for investment or business property, not personal use property…so you can’t swap one primary residence for another.
  • 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.
  • To qualify under a 1031 exchange, the intermediary on the seller’s behalf must also 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.

THE 4 TYPES OF 1031 EXCHANGES:

1. Simultaneous

Allows investors to relinquish and close on a replacement property in the same day.

2. Delayed

Most common. Allows investors to sell their investment property first, and find a replacement property within a certain amount of time.

3. Reverse

You buy first, you pay later. What makes this difficult is that this type of exchange must be an ALL CASH purchase and most banks won’t lend to you in these circumstances.

4. Construction/Improvement

There are a lot of investors that sell a property and 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.

Download the 1031 Exchange PDF here.