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DEFER YOUR
CAPITAL GAINS

WITH A 1031 EXCHANGE

Are you looking to sell real estate held for investment? The Internal Revenue Code (IRC) offers you one of the most important tax planning strategies to help preserve and grow your investment portfolio. Through a transaction called 1031 Exchange, you can defer the capital gains taxes that arise from the sale of real estate.

Modern Office Building

WHAT IS A 1031 EXCHANGE?

A 1031 Exchange allows you to sell your real estate property, reinvest the proceeds in "like-kind" real estate, and defer the payment of taxes on that sale. The Internal Revenue Service (IRS) defines like-kind as property that is similar in nature or character, regardless of differences in grade, property type or quality.

BASIC REQUIREMENTS:

FOR COMPLETE TAX DEFERRAL, INVESTORS MUST:

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  • Reinvest 100% of net sales proceeds into the replacement property;

  • Acquire an equal or greater amount of debt on the replacement property;

  • Identify potential replacement property within 45 days;

  • Close on the replacement property within 180 days

  • Use a Qualified Intermediary (QI)

IDENTIFICATION RULES

Three Property Rule:  The taxpayer may identify up to three properties of any fair market value and purchase any (or all) of them, regardless of total value. This is the most commonly used identification rule.

200% Rule:  The taxpayer may identify an unlimited number of properties provided the total fair market value of all properties identified does not exceed 200% of the fair market value of the relinquished property and may purchase as many (or all) of the identified properties.

95% Rule:  If the taxpayer identifies properties in excess of both of the above rules, then the taxpayer must acquire 95% of the value of all properties identified.

TIMING OF A 1031 EXCHANGE

To successfully complete a 1031 Exchange and defer your capital gains liability, you must follow very specific requirements over a strict 180-day timeline.

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DAY 1

Sell your property; proceeds are escrowed with a Qualified Intermediary (QI)

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DAY 45

Identify a property

within 45 days.

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DAY 180

Close on your new property within 180 days of the sale of the relinquished property.

POTENTIAL BENEFITS

TAX DEFERRAL

A properly executed 1031 Exchange may allow investors to defer state and federal income taxation upon the sale of appreciated real estate, thereby preserving equity and potentially maximizing total return.

ONGOING TAX BENEFITS

A portion of monthly income may be offset by depreciation.

INCREASED

CASH FLOW

Investors seeking more current income can 1031 Exchange from non-income producing or under-performing assets into one or more high-quality properties that may generate monthly income.

CAPTIAL APPRECIATION

Growth in overall value of real estate holdings is necessary to overcome the effects of inflation. A 1031 Exchange may provide investors the opportunity to allocate their capital into assets that may increase the potential for appreciation.

DIVERSIFICATION

A tax-deferred 1031 Exchange can be a powerful tool to realize investment diversification, which may be achieved by: diversification in geographic region (multiple properties in multiple states); asset class (office, industrial, retail, multifamily); tenant industry and creditworthiness; capitalization structure (debt vs. equity); and/or ownership structure (fee simple vs. leasehold and severalty vs. co-ownership).

PASSIVE INVESTMENT

One of the positive attributes of a 1031 Exchange for many investors is the ability to relinquish their ongoing property management responsibilities while still maintaining the potential for regular, monthly income from investment real estate.

INSTITUTIONAL QUALITY

Fractionalized real estate investments, structured as a Delaware Statutory Trust (DST), may offer investors the opportunity to own a partial interest in a higher quality asset than they could obtain individually. For example, investors may 1031 Exchange from raw land or residential rentals into large, Class A properties with credit tenants, professional management, and better long-term appreciation potential.

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This is for informational purposes only, does not constitute individual investment advice, and should not be relied upon as tax or legal advice. Please consult the appropriate professional regarding your individual circumstance. Because investor situations and objectives vary this information is not intended to indicate suitability for any individual investor.

 

There are material risks associated with investing in DST properties and real estate securities including liquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks, long hold periods, and potential loss of the entire investment principal.

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​Risks associated with 1031 exchange- A 1031 exchange has an identification period of 45 days from the sale of the relinquished property to identify a potential replacement property or properties depending on the value of the previous property. To defer all capital gains tax, you must reinvest the entire net proceeds from the sale of the relinquished property into the replacement property and acquire debt on the new property that is equal to or greater than the debt on the property that was just sold and relinquished.

 

Potential cash flows/returns/appreciation are not guaranteed and could be lower than anticipated. Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.

 

Institutional-grade properties generally refer to a property of sufficient size and stature to merit attention from large national or international investors, and typically have the characteristic of high-quality assets in major markets and at price points beyond the reach of individual investors and smaller partnerships.

 

This site is published for residents of the United States only. Representatives may only conduct business with residents of the states and jurisdictions in which they are properly registered. Therefore, a response to a request for information may be delayed until appropriate registration is obtained or exemption from registration is determined. Not all of the services referenced on this site are available in every state and through every advisor listed. For additional information, please contact Bart Harrison at 205-533-2052 or email bart@1031legacy.com.

 

Securities offered through Concorde Investment Services, LLC (CIS), member FINRA SIPC. Legacy 1031 is independent of CIS.

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