1031 Exchange | 1031 Investment Real Estate

The 1031 Exchange

What is a 1031 Exchange?

A 1031 exchange, also known as a like-kind exchange or a tax-deferred exchange, is a provision in the United States Internal Revenue Code (Section 1031) that allows individuals or businesses to defer paying capital gains taxes when they sell their investment real estate and reinvest the proceeds into other investment real estate or Delaware Statutory Trusts (DSTs). Through subsequent 1031 exchanges, investors can also effectively defer those capital gains taxes in perpetuity with ultimately an elimination of those capital gains taxes via a step-up in basis for their heirs. The primary purpose of a 1031 exchange is to encourage investment and stimulate economic growth by allowing taxpayers to defer capital gains taxes and potentially grow their investments and their wealth.

Here's how a 1031 exchange typically works:

Property Sale – The process begins with the sale of an investment property such as commercial real estate, residential rental properties, or vacant land and reinvesting the proceeds in another investment property or Delaware Statutory Trust (DST). In most cases a personal residence is not a like-kind investment property.

Qualified Intermediary (QI) – To qualify for a 1031 exchange, the seller must use a qualified intermediary. The QI is a third party responsible for facilitating the exchange and ensuring that the funds from the sale are not received directly by the seller. Please call us for a referral for a QI in your area.

Identification Period – Within 45 days of the sale, the seller must identify potential investment replacement properties or DSTs with the QI.

Closing on the Replacement Property – The seller has 180 days from the sale date to complete the acquisition of the replacement property or DST. In most cases closing on a DST will only take 5-10 business days and can be done within the 45-day identification period.

Deferring Capital Gains Taxes – By successfully completing a 1031 exchange, the seller can defer paying capital gains taxes that would otherwise be owed to the taxing authorities.

Please call us for a referral for a QI in your area.

1031 Do's

Do advanced planning for the exchange. Talk to your accountant, attorney, lender, Qualified Intermediary and us, 1031 Investment Real Estate prior to exchanging and possibly investing in a DST.

Do keep in mind these three basic rules to qualify for complete tax deferral:

• Purchase only “like-kind” replacement property: DSTs, Real Property

• Use all proceeds from the relinquished property for purchasing the replacement property.

• Make sure the debt on the replacement property is equal to or greater than the debt on the relinquished property. (Exception: A reduction in debt can be offset with additional cash into the exchange).

1031 Dont's

Do Not take possession of the proceeds of the property you just sold (relinquished property). Doing so will disqualify your exchange. A QI must take possession of your proceeds.

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 your exchange.

Do Not attempt doing a 1031 exchange using your attorney or CPA to hold title or funds. IRS regulation requires a Qualified Intermediary (QI) to properly complete an exchange. Please call us for a referral to a QI that operates in your area.

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.

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This content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.

Securities offered through Great Point Capital, LLC (GPC); member FINRA/SIPC/IEX. Advisory services offered through Great Point Advisors (GPA), LLC; an SEC registered investment adviser. 1031 Investment Real Estate is independent of GPC & GPA.

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