Perhaps you’ve heard of 1031 exchanges or like-kind exchanges, but you’re unsure of the benefits or whether you even qualify. The Internal Revenue Code 1031 is available to those who hold a property that qualifies as productive use in business or investments. If you have a piece of investment property, a 1031 exchange allows you to swap it for a similar property.
What is a 1031 exchange?
This type of exchange happens when an investor trades his or her real property for a similar or “like-kind” property. Investment properties such as shopping malls, residential buildings, stadiums and more can all be traded among themselves — like-kind merely refers to the type of investment and not the physical form. However, certain types of properties, such as those considered stock in trade, are excluded from 1031 exchanges.
Benefits of a 1031 exchange
The primary benefit of a 1031 exchange is that the investor can trade in their property and defer any capital gains or losses due at the time of sale, as well as any capital gains taxes. There is also no limit on how many times you can exchange property. From an investor’s standpoint, this means that you can continue to make a profit on each additional swap, but you won’t pay any tax on it until you finally sell it off down the road.
What does like-kind exchange mean?
Investors can exchange a single-family home for a beauty salon, a recreation center for an apartment building, and so forth — the physicality of the property is not associated with the term like-kind. Although the guidelines for like-kind may seem open-ended, there are some restrictions that you don’t want to fall prey to, so make sure to hire a professional to assist you with the process.
What are the deadlines?
Once the sale closes on your first property, your facilitator will receive the cash from the sale and you must submit, in writing, the property you are exchanging it for to your facilitator within 45 days. You have 180 days, starting on the day of sale of your first property, to close on the second.
How to choose a facilitator
There are many restrictions when choosing a facilitator, mainly because the facilitator cannot also function as an agent. Attorneys, Realtors or CPAs are all unsuitable as a facilitator; however, you can ask them for recommendations for a facilitator.
These are just the basics; there are a lot of details and exceptions in the fine print of the tax code. Contact us here or email a WFY advisor at firstname.lastname@example.org so we can help you decide when and how a 1031 exchange might be right for you.
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