What is a 1031 Tax Exchange

Whenever you sell a business or investment property and have a gain, you generally have to pay tax on the gain.  How much tax you pay will vary depending on what state you live in and your circumstances, but generally it ranges from 15% to 30%.

Internal Revenue Code Section 1031 offers you the opportunity to defer, or possibly eliminate, this capital gains tax if you exchange the property you are selling for other property. You defer the payment of normally due tax until sometime in the future, and under certain circumstances, you may never pay the tax. 

A 1031 Exchange is often called "tax free exchange" because tax is not paid on the transaction.  Tax free exchanges have been around since the 1920's but guidelines have changed throughout history.  Details can seem complicated, but with an experienced professional guiding your transactions, you can be assured that your tax-free exchanges are easy, worry-free and most important, safe.

  Goals you can accomplish through a 1031 exchange

Increase Cash Flow- Exchange 40 acres of non-productive bare land for cash-flow rich mini-storage units. 

Diversity-Exchange commercial property for industrial and apartments.

Ease Your Tax Burden- Exchange your apartment complex for a commercial building with a triple-net lease.

Consolidation-Exchange multiple forms for one larger farm or ranch.

Change location- For example, you might exchange rental houses in Arizona for rental houses in Texas. This is usually done when the owner moves and wants his/her investment close by, or wants to move their investments to a better, more dynamic market.

Management Relief-Exchange multiple hunting ranches to one larger ranch or hunting operation.

Improve the Quality of Your Investment- You could exchange your 40-year old strip mall for a recently built commercial property.

"Relocate" Your Vacation Home- Depending on circumstances, you could exchange a vacation home in Jackson Hole, Wyoming for a new vacation home in Aspen, CO. 

If structured properly, all of the goals in the above examples can be accomplished without having to pay any tax to the federal or state governments.

What is Like-Kind Property?

Pursuant to IRC §1031, capital gain tax deferment requires the exchange of like-kind relinquished property for other like-kind replacement property. Contrary to the commonly held misconception that exchanged properties must be of the exact same type - for example, that bare land be exchanged for bare land or an income property be exchanged for another income property - the actual definition of like-kind is far more empowering in its flexibility. Any real property held for investment or real property used in a trade or business can be exchanged for any other real property held for investment or real property used in a trade or business.

• However, you cannot trade raw land for a personal residence (it is not considered business or investment real estate) or equipment ( it is not considered real estate). Like-kind property can include, but is not limited to, any of the following, provided it is held for investment.
• Farm Land
• Ranch Land
• Wildlife Land
• Recreational property
• Single Family Rental
• Apartments
• Commercial Properties
• Storage Units

The Delayed Exchange

DOES AN EXCHANGE NEED TO BE SIMULTANEOUS?

No, contrary to what most owners envision, a §1031 tax deferred exchange is rarely a two-party swap. Most exchanges are delayed exchanges, whereby the Exchanger has 180 days between the sale of the relinquished property and the closing of their replacement property. They must identify the potential replacement property(s) within 45 days from closing on their relinquished property.

The use of qualified intermediary is required to complete a vaild exchange. The qualified intermediary prepares the necessary exchange documents to assist the exchange with meeting the many detailed requirements of the code.

You might consider exchanging a cotton farm for that vast southwestern ranch you have always wanted.