1031 Exchange

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Is it time to recognize investment gains in your real estate portfolio?

In general, a “1031 Exchange” refers to the Internal Revenue code section 1031 that offers

a real estate investor or trade or business owner the opportunity to defer ALL their

capital gains tax owed from the sale of an investment or trade or business property.

Here are the basic rules:

1. To take a 100% deferral of the Capital Gains tax, the Investor (also known as the Exchanger)

has to reinvest ALL the equity and debt from the sale of the property into another investment

property of equal or more value.

2. The property the Investor/Exchanger sells is called the Relinquished Property.

3. The property the Investor/Exchanger buys with the proceeds is called Replacement Property.

4. To avoid issues about the validity of handling the exchange, the option that is most frequently

used is for the Exchanger to hire a third party known as a Qualified Intermediary

(also known as a Q.I., Accommodator or Facilitator) to do the necessary

paperwork for both transactions, hold the proceeds in an escrow account and make such funds

available for the purchase of the new property.

5. Both the Relinquished and Replacement properties have to be investments or used in a trade

or business. For 1031 Exchanges dealing with real estate (they can be used for other property),

the real estate can be land or an improved property.  If the property is an improved property,

then there should be either a rental history or at least a legitimate attempt to rent it out

or use it in a trade or business. A primary residential home or “flipped” properties are not eligible.

6. The Exchanger is bound by a strict time line to close on both transactions:

a.   The Exchanger has 45 calendar days from the close of escrow on the Relinquished Property

to provide written identification to the Intermediary of up to three properties he/she is

considering buying as a Replacement Property. If the Exchanger needs to identify

more than three properties, additional restrictions apply.

b.   The Exchanger has 180 calendar days from the close of escrow on the Relinquished Property

to close escrow on whichever identified property(ies) are to be used as

the Replacement Property.

7. At the closing of the Relinquished Property the Exchanger and Intermediary sign a

“Like-Kind Exchange Agreement”. This establishes their relationship. The Exchanger and

Intermediary sign an “Escrow Instructions” document, defining the handling

of the escrow. The Exchanger and Buyer sign an Assignment of Contract, which assigns the

contract to the Intermediary.  When the Relinquished Property closes, the proceeds are wired

to the escrow account of the Intermediary. It is on this transaction that the Intermediary

usually collects their fee.

8. When the Exchanger sets up the closing on the Replacement Property, the Intermediary

coordinates with the closing agent to wire the money for the closing and send the necessary

documents for the closing.

9. There are other types of exchanges including a Reverse, Simultaneous, Aircraft/Business

and Improvement Exchanges.

I recommend that any tax payer considering a 1031 exchange should first consult their tax

professional to discuss their specific individual situation. I will work in conjunction with

your tax professional to help guide you through the process.

identification to the Intermediary of up to three properties he/she is considering buying as a

Replacement Property. If the Exchanger needs to identify more than three properties,

additional restrictions apply.

Please call me for more information on 1031 exchanges and let’s figure out the best strategy for you!

Stefan

About the Author
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stefanlevine

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I embrace the challenges of putting deals together in this ever-changing and fast moving business and I am open for business! I work in residential and commercial in both purchase and lease for both end users and investors.

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