A 1031 Exchange is a transaction that allows a taxpayer to defer the capital gain tax on a property sale. This specially structured transaction permits a taxpayer to rollover (partially or fully) the gain from the sale of one investment property into another. The rules established by the IRS must be stringently followed, but a 1031 Exchange could result in substantial financial benefits for the investor.
Below is a simplified summary of the primary rules that must be followed for a successful 1031 exchange.
1. Real Property Rule. Both your old and replacement property must qualify as “Real Property” and be utilized for investment or business purposes. In most cases this means an actual ownership interest in a physical property. Examples would be a commercial building, a residential rental property, land held for investment gains, mineral interests etc.
2. Sale of the Old Property. Prior to the sale closing the investor must engage the services of a Qualified Intermediary (QI). The IRS requires that all proceeds from the sale must be held by the QI in an escrow account and the QI must ensure all the legal transfer documents conform to 1031 Exchange Rules. The QI must be an independent third party.
3. Identification of Replacement Property. The investor has 45 days from the sale of the old property to identify several potential properties for purchase. There are stringent rules which limit the number of potential properties which can be formally identified to the QI. For the 1031 Exchange to succeed the replacement property must be one of the identified properties and be of “Like Kind.” Real Properties generally are of Like Kind regardless of whether the properties are improved or unimproved.
4. Exchange Period. The investor must close on the purchase of the Replacement property within 180 days of the sale of the old property. In order for all capital gains taxes to be deferred, the Replacement property must be purchased by the same investor, be of equal or greater value and be financed by equal amounts.
5. Proper Title Holding. The investor must take title to the Replacement property exactly as title was held for the old property.
A NNN leased property can be an excellent Replacement property in a 1031 Exchange. This could enable an investor to dispose of their high risk, management intensive property with a management free property that produces long term, consistent and predictable cash flows.
If you are contemplating the sale of an investment property Ideal Location ® , Inc. would be happy to tailor a Replacement property portfolio to achieve your stated objectives. Simply fill in the 1031 Exchange Information Worksheet . Once received, we will match available properties with your criteria and get back to you with specific opportunities.