1031 Exchanges

One of the greatest tools of wealth acquisition using real estate is the 1031 exchange. We help investors acquire more profitable buildings than they currently own to improve monthly cash flow and avoid transaction taxes.
Here is a brief overview.

What types of property qualify for Section 1031?

Section 1031 provides that gain or loss is not recognized when property held for productive use in investment, business or trade, is exchanged for “like-kind” property to be held for the same purpose. Any property held for this purpose that is not your primary residence is eligible for exchange.

An owner occupied mixed-use apartment building can still be an exchange. The exchangeable portion will be that portion of the building leased out.

What is Like-Kind Property?

Any real estate held for investment purposes meets the broad definition of what is “like-kind.” Common investment properties include commercial real estate, rental property, bare land, apartment buildings, etc.

What is other exchangeable property?

Personal property held for productive use in an investment can be exchanged.

Do I have choices?

Your particular situation will lead you to choose from different types of exchanges afforded to you under the code. Below are brief descriptions. I, and your tax advisors, will help you determine the best type of exchange to fit you.

The following gives you brief descriptions of the different exchanges available.

Types of exchanges

Delayed Exchange – The Delayed Exchange, also known as the Starker exchange, is the most common. The Delayed Exchange process begins upon the relinquished property’s close-of-escrow. From that close, you have a maximum of 45 days to identify up to three potential properties that you wish to exchange. After this 45-day period, you have an additional 135 days to complete the purchase of one or all three of those properties identified. While it sounds complicated, it is actually pretty easy to satisfy the I.R.S. regulations.

Simultaneous Exchange – A Simultaneous Exchange can occur when you have already identified a property or properties you wish to exchange for prior to the relinquished property’s closing of escrow. The two properties will be exchanged concurrently to complete the exchange. The risk of timing complications is real. So investors typically call on a qualified intermediary for assistance in doing this type of transaction.

Improvement Exchange/Build-To-Suit – Often, the investor wants to make improvements to the replacement property to have the cost of the improvements included in the exchange value of the replacement property. Remodeling an existing building or the construction of a new building on raw land are common improvements. An important timeline requirement is completion of all improvements and dispersing the exchange trust within 180 days. Therefore, you allow for certain uncalculated risks to arise, making advance planning critical in conducting an Improvement/Build-To-Suit Exchange.

Reverse Exchange – The special advantage of a reverse exchange is that it allows exchangors to find a replacement property before they sell the investment property they currently own. This legal procedure was formalized by IRS rulings as of October of 2000. An Exchangor can now purchase the desired property without the time restrictions found under other types of exchanges. The intermediary will help you acquire title to that new property, allowing enough time to close the old one. Another way to look at is that the Intermediary holds your up-leg property until you’re ready to make the exchange. There are quite a few rules and higher costs. But this works well for the right transaction.

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