1031 Exchange : Frequently Asked Questions
1. What is a 1031 Exchange?
2. How does it work?
3. How do I get started?
4. Is a 1031 Exchange a gimmick or loophole in the Internal Revenue Code?
5. Capital Gains taxes are at their lowest in years. Why shouldn’t I just pay the taxes and not defer taxes?
6. Can’t my own attorney or CPA serve as my Qualified Intermediary?
7. Do I have to know what property I will be purchasing when I start the exchange?
8. How long do I have to purchase my replacement property?
9. May I purchase replacement property before I sell the property that I own?
10. What if I live on part of the property?
11. What should I think about when investing in a triple net leased investment?
What is a 1031 Exchange?
A 1031 Exchange is a transaction in which a taxpayer is allowed to sell one property and buy another without a tax consequence. This can be done through a simultaneous or delayed 1031 Exchange. The transaction is authorized by Section 1031 of the IRS Code. It is the best strategy for the deferral of capital gains tax that would ordinarily arise from the sale of real estate.
A successful exchange results in the taxpayer being able to utilize 100% of the proceeds from the sale of property to purchase a new property, thereby deferring capital gains taxes.
Real Estate owners can accomplish virtually any objective with 1031 Exchanges, including greater leverage, diversification, improved cash flow, geographic relocation, and/or property consolidation.
How does it work?
A 1031 Exchange is usually a three-way delayed exchange, referred to as a "Starker Exchange", in which an intermediary is used to facilitate the transaction. There are four basic steps:
- Seller arranges for sale of property and includes exchange language in contract.
- At closing, sales proceeds go to a Qualified Intermediary for a 1031 Exchange.
- Seller identifies potential exchange properties within 45 days of the closing.
- Seller completes 1031 Exchange within 180 days of closing.
In a 1031 transaction, these steps can also occur simultaneously. Preferable, before you sell your property, you need to consider what type of replacement property will work best for you, and whether or not you want to own a whole or partial interest in a property. Increasingly, investors are choosing to purchase a partial Tenants In Common interest for several reasons.
How do I get started?
Contact us and we will be happy to answer your questions and provide you with the information you need to consider a 1031 Exchange. Contact us
Is a 1031 Exchange a gimmick or loophole in the Internal Revenue Code?
No. Section 1031 has been a part of the Internal Revenue Code since the inception of the Code, during the 1920’s.
Capital Gains taxes are at their lowest in years. Why shouldn’t I just pay the taxes and not defer taxes?
We will assist you in deciding what is best, but there a number of other taxes that you should consider other than capital gains, such as:
· A 25% federal tax on the portion of capital gain attributable to depreciation taken
· State income tax
· Possible exposure to the Alternative Minimum Tax.
Can’t my own attorney or CPA serve as my Qualified Intermediary?
No. A Qualified Intermediary must remain completely independent and cannot have been your agent in the past 2 years.
Do I have to know what property I will be purchasing when I start the exchange?
No. You have 45 days from the sale of your relinquished property to identify your potential replacement properties.
How long do I have to purchase my replacement property?
You have 180 days from the sale of your relinquished property by which you must close on the purchase of your replacement property/properties.
May I purchase replacement property before I sell the property that I own?
Yes. This is a Reverse Exchange with greater complexity.. Reverse Exchanges must be initiated before you purchase the replacement property.
What if I live on part of the property?
The taxpayer can split the transaction between 1031 and the personal residence exemption (Section 121: $250,000 for an individual or $500,000 for a married couple).
What should I think about when investing in a triple net leased investment?
Pre-acquisition due diligence is very important. One must review to ascertain the degree to which the lease is, in fact, triple-net, the creditworthiness of the tenant, and the suitability of the real estate itself for the proposed and subsequent use. Finally, match your discovery with your own determined needs and wants. Carefully structured and underwritten, a triple net leased real estate investment can be a terrific passive investment.
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Information Provided by NNN Properties.
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