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.
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.
FOR COMPLETE TAX DEFERRAL, INVESTORS MUST:
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)
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 any (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.
Sell your property; proceeds are escrowed with a Qualified Intermediary (Q1)
Identify a property
within 45 days.
Close on your new property within 180 days of the sale of the relinquished property.
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.
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.
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.
A tax-deferred 1031 Exchange can be a powerful tool to realize investment diversification, which may be achieved by: diversification 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).
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.
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.