The 1031 Exchange is quite possibly the most powerful investment tool available to property owners. Exchanging gives investors the ability to move from investment to investment equity intact. IRS Code 1031 allows investors to defer paying both Federal and State capital gains taxes and depreciation recapture when they sell an 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.
Section 1031 of the IRS tax code provides one of the best strategies for the deferral of capital gains taxes which would ordinarily be due on the sale of real estate. Exchanging defers the recognition of the capital gains tax and depreciation recapture, leaving the property owner with substantially more proceeds to purchase a replacement property. The tax code states; "No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business, or for investment purposes if such property is exchanged solely for property of like-kind, which is to be held for other productive use in trade or business or for investment purposes."
Real estate investors can accomplish virtually any investment objective with 1031 exchanges, including greater leverage, diversification, improved cash flow, geographic repositioning, and property consolidation or diversification.
Offerings provide flexibility such as:
| Locations | Nationally |
| Property Size | $5 to $100 Million |
| Transaction Size | $150,000 of Equity to Unlimited |
| Yields | 7% - 10% annualized on equity, paid monthly |
| Choices | Office, Retail, Industrial & Apartment Buildings |
| Financing | All cash to 80% leverage |
It is often difficult in the short 45-day time frame to locate a property that has the right purchase price, debt ratio, and closing schedule to meet the 1031 exchange requirements and then arrange any financing that may be necessary, let alone name up to three attractive properties as allowed by IRC 1031. Tenant in Common investors have a number of advantages, such as:
A 1031 Exchange is a transaction in which a taxpayer is allowed to sell one property and buy another without a tax consequence. This can be done through a simultaneous or delayed 1031 Exchange. The transaction is authorized by Section 1031 of the IRS Code. It is the best strategy for the deferral of capital gains tax, state & federal, that would ordinarily arise from the sale of real estate.
A successful exchange results in the taxpayer being able to utilize 100% of the proceeds from the sale of property to purchase a new property, thereby deferring capital gains taxes.
A 1031 Exchange is usually a three-way delayed exchange, referred to as a "Starker Exchange", in which an intermediary is used to facilitate the transaction. There are four basic steps:
In a 1031 transaction, these steps can also occur simultaneously. Preferably, before you sell your property, you need to consider what type of replacement property will work best for you, and whether or not you want or need to own a whole or partial interest in a property.
TIC is a form of holding title to real estate, common among unrelated parties. As a TIC owner, you have a separate deed and unilateral control of your undivided, fractionalized interest. You may keep it or sell it. No one is making material decisions for you. The property's economic and tax benefits are shared pro rata. Your tax reporting is on Schedule E, the same as with any investment real estate.
You may own management intensive real estate. Although you are comfortable with real estate investments and have had good returns in the past, you do not like the daily headaches that can accompany real estate management. You are ready to give up the hassles of dealing with tenants, maintaining facilities, paying property taxes, etc. You would like to sell your property but are faced with onerous tax consequences on the sale.
You'd rather enjoy the income from the property and let someone else manage it. With a TIC 1031 Exchange, you can do exactly that.
A TIC 1031 Exchange allows you to exchange your management-intensive property for an institutional-quality property with the potential to generate steady income, tax benefits and appreciation. With a TIC 1031 Exchange, you no longer have to feel burdened by your real estate.
Through your management contract, a manager will be retained to manage the asset while you enjoy all the benefits of income property ownership-and freedom from management duties.
Your income from the replacement property may be higher than what you were receiving from the original property. You can earn substantial cash flow that may be up to 60% sheltered by the depreciation of your new basis in your TIC purchase.
No capital gains taxes may be due until the replacement property is eventually sold. If you shuffle off this mortal coil while owning a property, your heirs will receive a stepped up basis and the capital gains tax will be completely avoided.
Discuss your specific needs with your Registered Representative who will be happy to answer your questions and provide you with the information you need to consider a 1031 Exchange.
Like-Kind refers to the type of property being exchanged. You can exchange any real estate investment for any other type of real estate held for investment purposes - for example, vacant land can be exchanged for rental property. In most cases your personal residence is not Like-Kind investment property.
To accomplish a fully tax-deferred exchange, the rule of thumb is "exchange even or up in value; exchange even or up in equity and in debt."
To the extent that you do not exchange even or up in value and/or exchange even or up in equity and debt, you will have received non-qualifying property ("boot") in your exchange. If boot is received, tax is computed on the amount of gain on the sale or the amount of boot received - whichever is lower.
"Buyer hereby acknowledges that it is the intent of the Seller to affect an IRC Section 1031 tax deferred exchange which will not delay the closing or cause additional expenses to the Buyer. The Seller's rights under this agreement may be assigned to a Qualified Intermediary, named by Seller, for the purpose of completing such an exchange. Buyer agrees to cooperate with the Seller and the Qualified Intermediary in a manner necessary to complete the Exchange"
DO advanced planning for the exchange. Talk to your accountant, attorney, broker, financial planner, lender and Qualified Intermediary.
DO NOT miss your identification and exchange deadlines. Failure to identify within the 45-day identification period or failure to acquire replacement property within the 180-day exchange period will disqualify the entire exchange. Reputable Intermediaries will not act on back-dated or late identifications.
DO keep in mind these three basic rules to qualify for complete tax deferral:
DO NOT try to do a 1031 exchange yourself using your CPA or attorney to hold title or funds. IRS regulation requires a Qualified Intermediary to property complete an exchange. Call us for the name of one that operates in your area.
DO attempt to sell before you purchase. Occasionally exchangers find the ideal replacement property before a buyer is found for the relinquished property. If this situation occurs, a "reverse" exchange (buying before selling) may be necessary. Exchangers should be aware that reverse exchanges are considered a more aggressive exchange variation because no clear IRS guidelines exist.
DO NOT dissolve partnerships or change the manner of holding title during the exchange. A change in the Exchanger's legal relationship with the property may jeopardize the exchange.