WHAT IS A 1031 EXCHANGE?

A 1031 property exchange is based on a provision in the IRC rules (section 1031) which provides that no gain or loss related to capital gains need be recognized on the "exchange" of any type of property used for business or investment.

1031 exchanges are not actual exchanges where two entities exchange properties in some sort of barter, rather they are typically sales and purchases occurring the same way as any other sale or purchase, but without attracting a capital gains tax if they follow the procedures laid out in Section 131 of the IRS rules. The real difference is the investor is increasing his selling and buying power by avoiding capital gains taxes under Section 1031 regulations. No other aspects of the transaction are affected.

A 1031 exchange allows an investor to sell an investment property and defer capital gains and depreciation recapture taxes by reinvesting 100% of their equity into another "like kind" property of equal or greater value. Investors can potentially upgrade their property holdings (and cash flow) by exchanging their sole owned property for an interest in a Tenant In Common ownership opportunity, which offers all the benefits of real estate investment while eliminating the headaches of day-to-day property management.

WHY WOULD SOMEONE WANT TO DO A 1031 EXCHANGE?

1031 exchanges provide an ideal solution for investors that want to keep real estate in their investment portfolio and want to:

• Redeploy dormant equity "locked" in their income properties.
• Defer the punitive capital gains and depreciation recapture taxes due when selling investment properties.
• Explore institutional grade property investment options.

ADVANTAGES OF 1031 EXCHANGES

• Increase your buying power since federal capital gains taxes are deferred, allowing you to leverage these savings by putting them into the new property you are purchasing.
• Acquire replacement property with greater income potential, for instance by selling raw land and acquire income-producing property.
• Consolidate several difficult to manage properties into one easy to manage large property like a triple net leased property.
• By deferring the tax, you have more money available to invest in another property. In effect, you receive an interest free loan from the federal government, in the amount you would have paid in taxes.
• Any gain from depreciation recapture is postponed.
• You can acquire and dispose of properties to reallocate your investment portfolio without paying tax on any gain.

WHO SHOULD CONSIDER A 1031 TAX DEFERRED EXCHANGE?

Anyone who is considering selling a business or investment property should investigate the merits of a 1031 exchange. By electing to use a 1031 exchange the savvy investor has an opportunity to reinvest the federal capital gains that he would normally pay on the sale and put that money to work. Don't let a portion of your hard work go to the IRS without carefully considering this reinvestment option. You can consider the savings resulting from a 1031 exchange as an interest free loan from the IRS and a loan in which the principal may be increased through subsequent exchanges and which may never require repayment if you plan properly.

MISCONCEPTIONS ABOUT 1031 EXCHANGES

• There are those who still believe that you must “Swap” properties in order to effect a successful 1031 exchange. Although this was a requirement in the original code, this is no longer required today. You are now enable one to sell you property in a normal manner, provided that you reinvest the returns of that sale in accordance with the 1031 rules.
• Many believe that only investors in large commercial properties can get the benefits of Section 1031, but this is not the case. The nice thing about 1031 exchanges is that they apply to all investment properties, large and small. 1031 exchanges result in savings for a corporation selling a large shopping mall and will also provide benefits for an individual selling a single-family home used as a rental property in a vacation area.
• Many believe you must acquire a property of similar kind or type in order to qualify for the benefits of a 1031 exchange. While the term "like-kind" exchanges is often used in reference to 1031 exchanges, this term simply refers to real property held for business use or investment. You can sell vacant land and acquire an apartment building or sell a warehouse and acquire raw land; you can sell one property and use the proceeds to invest in three properties or you can sell four properties and only acquire one. Virtually any type of real property used for business use or investment will qualify.
• A common misconception is that 1031 exchanges are too complicated to be worth doing. Nothing could be further from the truth, in fact when working with a qualified 1301 exchange intermediary the process is very simple. The intermediary will keep you aware of the requirements you must comply with and insure that everything is done in strict compliance with 1031 regulations.

BESIDES TAX REDUCTION, 1031 SWAPS CAN ACCOMPLISH MANY INVESTMENT GOALS:

Increased buying power due to the availability of funds that normally would have gone to pay capital gains taxes.

Preservation of your estate your selling power is increased since you can offer a more flexible selling price increases your income by exchanging for properties with greater income (More profitable locations, lower operating costs, more rental units or a higher rental income per unit, etc.) relocation of your business or investment property to a more profitable or desirable location. Expand you business into a larger space without tax penalties.

All of these advantages culminate in the ability to speed wealth accumulation in real property ownership.

IRS Code

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