To many, a 1031 Tax Exchange appears to be a complicated process, when in actuality, as long as you know the “rules” it’s a fairly simple transaction.
The 1031 is a tax deferral strategy where an investment property owner sells one or more properties for one or more like-kind replacement properties, deferring the payment of state and federal capital gains and recaptured depreciation taxes.
The idea of the 1031 materialized hundreds of years ago when property owners bartered for property. Farmers would trade land for land or livestock for livestock. When a better horse or cow was traded, the farmer would request something in addition to equalize the value of the trade. That something extra may have been crops, weapons, or money. These additional items of value were known as boot.
The original 1031 was legislated into law in 1921. The law remained basically unchanged until time limits were imposed in 1984- the was a result of the Starker ruling in 1979. In 1984 the 45 and 180 calendar day limits were imposed, this required the replacement property to be identified by the 45th calendar day post-closing with the 1031 exchange completed no later than the 180th calendar day post-closing.
There is no limit on how many times you can do a 1031. An investor avoids paying tax until they actually sell for cash.
- 1031 is for investment property, not personal property.
- Like-kind property = investment property for investment property (apartments for a ranch, strip mall for raw land are all examples possible exchanges that qualify)
- Replacement Property Identification- When the sale of your property closes, a qualified intermediary receives the funds. Within 45 days, you must specify in writing the property you want to purchase (exchange into) in writing to the intermediary. Three properties can be identified, as long as you close one of them.
- Six Month Closing- Once you identify the exchange property, you must close with on the new property within 180 days of the sale of the old. The clock starts ticking when the sale of your property closes. The 45 day and the 180 day time period run concurrently.
- Boot: “Non-like kind” property receive, “boot” is taxable to the extent this is a capital gain.
- Exchange Period: The time frame in which a replacement property must be identified. 180 days after the sale of the relinquished property.
- Identification Period: 45 days from the relinquished property closing
The entity who facilitates the exchange by performing the following:
- Not a related party (agent, attorney, broker)
- Receives a fee for the exchange
- Receives the relinquished property form the Exchanger and sells the property to the Buyer
- Purchases the replacement property form the Seller and transfers it the Exchanger.
When contemplating a 1031 Exchange it is best to always consult with a CPA, Tax Attorney or qualified intermediary before you begin the process.
About Preston Hall – Preston has completed 130 transactions in the past 6 years in commercial real estate using his client focused service. He specializes in office, retail, and multi-family properties in the Tallahassee, Florida area. Click here to read his full bio, or if you would like to contact him, you can call him at 850-877-6000 or email him at [email protected]
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