How to Decide if a 1031 Exchange is Right for You
A 1031 exchange is the act of making a likeÂkind trade of two assets using certain IRS 1031 exchang...
There are many powerful results an investor can receive in using the process of a 1031 Exchange. Meridian is here to help you understand the rules, techniques and opportunities in what can be a confusing landscape of deadlines, terms and transactions.
Use of a 1031 exchange enables investors to keep a significantly greater amount of their capital invested and generating returns, since payment of the tax liability is deferred.
A 1031 exchange in real estate is fairly straightforward to accomplish. Section 1031 of the Internal Revenue Code lays out the guidelines that must be followed to execute a 1031 exchange. While there are a number of categories of assets that can be transacted under a 1031 exchange, the information that follows pertains only to real estate investment property.
Investors over the years have turned to Meridian to help them develop a strategy for improving the returns on their investment properties. Meridian can help with a real estate 1031 Exchange in several ways.
During the identification period, the investor has exactly 45 days from the date his or her relinquished property has sold to identify in writing the replacement property or properties to be purchased. Identification usually consists of an address and/or legal description. There is no extension of the 45 day deadline under any circumstances. This 45 day timeline is step one of the requirements of the 1031 exchange rules.
The second stage of the like kind exchange is the exchange period, which is the time frame in which the investor must receive (or close escrow) on the 1031 Exchange replacement property. This period ends at exactly 180 days after the date on which the person receives the relinquished property, or the due date for the person’s tax return for that taxable year in which the acquisition of the relinquished property has occurred, whichever occurs first. In the latter instance, an investor can always file for an extension on his or her tax return, in which case the exchange period would still be 180 days.
Violation of either the identification or the exchange periods will result in the invalidation of the 1031 exchange, and the investor must pay the taxes due on the capital gain. Therefore it is important for the investor to not wait until the last minute to either identify or close escrow on the replacement property to stay within the 1031 tax exchange rules.
A 1031 exchange is the act of making a likeÂkind trade of two assets using certain IRS 1031 exchange rules. Under certain conditions, you can defer capital gains tax payments. This applies to different categories of asset exchanges, but one of the most common is real estate transactions.
If you are considering a 1031 exchange, you probably have quite a few questions. Here are the answers to some of the most important IRS 1031 exchange rules.
Any two properties that are set aside for business or investment use qualify for a 1031 exchange. The assets also are supposed to be equal in nature, character or class. However, the quality of the two pieces of real estate does not matter, and they do not have to be identical.
Any property meant for personal use such as a vacation home cannot be exchanged for commercial property. However, you could trade one piece of commercial real estate for another, and this includes swapping vacation homes rented by tenants. Offices, warehouses or production sites also qualify.
Usually, business or investment property owners can make a 1031 trade. This includes owners of a sole proprietorship, C Corporation, S Corporation, trust or partnership. Any other taxpaying entity such as a limited liability company also can set up a likeÂkind business or investment property trade.
In order to avoid a capital gain tax, you must identify a potential replacement property with 45 days of selling a relinquished property. The replacement real estate identification must be documented in writing, and this includes a legal description, street address, or distinguishable property name.
You also have up to 180 days after the sale of an exchanged property to receive the replacement real estate. Otherwise, you will be subject to capital gain taxes.
According to the LikeÂKind IRC IRS 1031 exchange rules, you can choose between three types of likeÂkind transactions. IRS documentation further explains the differences between three 1031 exchange structures: simultaneous, deferred and reverse.
The simultaneous exchange is the swapping of two properties at the same time. Deferred exchanges allow you to surrender your real estate and later replace it according to IRS 1031 guidelines. A reverse exchange, on the other hand, allows you to acquire a replacement property through a likeÂkind accommodation titleholder. This real estate is then parked for up to 180 days during which time the taxpayer disposes of the relinquished property.
It is important to remember that capital gain taxes are deferred, not forgiven as many people would believe. You are required to track and calculate the basis of your property trades. A bonded and insured QI specialist could assist you further with the 1031 exchange legal process.
Meridian has a track record of helping investors identify, analyze and close successfully on 1031 exchange properties which offer:
We partner with 1031 Exchange investors and accommodators to find 1031 exchange replacement properties to improve cash flow in a full reallocation or make use of any remaining boot leftover in during an exchange.
Below are two like kind 1031 exchange examples which so how an investor can take the proceeds from a sale and use them to identify and acquire 1031 exchange properties.
When an investor sells investment real estate for a gain, capital gains tax is due in conjunction with the sale. A 1031 real estate exchange, sometimes known as a 1031x or a tax-deferred, like-kind exchange, offers investors the opportunity to defer payment of capital gains taxes on the investment property gains under certain conditions by exchanging, or purchasing, a like-kind replacement property.
While simplified, the infographic below illustrates the power of a 1031 exchange in real estate. The ability under the tax law to defer payment of taxes enables an investor to have more capital invested than he or she would otherwise, and therefore enables higher returns on investment.
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