The sale of a business or investment asset, whether it is real estate or capital equipment, can create a large tax liability.   A properly structured tax deferred exchange under Internal Revenue Code §1031, however, allows businesses and individuals to defer the recognition of the capital gains or other taxes associated with the sale of most business or investment assets, as long as new assets are purchased to replace the existing assets. In general, most tax deferred exchanges are structured either as a real property or a personal property exchange. Real property exchanges include only interests in real property, while personal property exchanges encompass virtually all other types of property.

To be eligible for the favorable tax treatment afforded by an exchange, the property or business asset to be disposed of must have been held by the client for productive use in a trade or business, or for investment purposes, and be exchanged for like-kind replacement property that will be held by the client for similar purposes. With few restrictions, whether an exchange involves a parcel of real property, an airplane, a broadcast spectrum, or a fleet of cars, exchanges allow businesses and individuals the flexibility to sell property to whomever they wish, and to buy new property from whomever they wish. There is no requirement that property be “swapped” to be eligible for an exchange nor do exchange transactions require any significant changes to the terms of the sale and purchase agreements.

By utilizing an exchange clients are able to maximize their capital by deferring the taxes that would otherwise be incurred on an outright sale of their property and use the entire amount of the equity from the exchange to acquire substantially more replacement property. Properly structured and administered, an exchange becomes an invaluable tax saving tool and an integral element of the business cycle.

For a more detailed explanation of the various elements and regulatory requirements of tax deferred exchanges, please contact Neil Fischer, broker at 866-530-LAND.

The 1031 Exchange Simplified

Here is a brief overview of five main categories of information related to 1031 exchanges.  Each exchange transaction is unique. 

Property:  To use the 1031 exchange, you must sell and then buy property recognized by the IRS to be in the same category.  For example, if you sell land zoned as commercial, then you might purchase an industrial property.  If you sell a rental home, you might purchase a multi-home dwelling.

Cash flow:  The proceeds from the initial sale cannot be touched—not by you, your friend, your broker, or your attorney—not by anybody.  So where does the money go?  It goes to a place called Safe Harbor also coined "Qualified Intermediary or Qualified Escrow Holder" that protects every penny of your sale to apply to the escrow of the new purchase.

Timeline:  A few restrictions apply relating to timing.  In the most common type of exchange, you have 45 days from the time you sell your initial property to identify up to three like properties that you plan to purchase.  Then you have up to 180 days* to close on a new property from the list you identified.  Contact Neil Fischer 866-530-LAND  for more details about this time limit.  *May be less than 180 days with tax date limits.

Investment Value:  The rules of the 1031 exchange state that you must reinvest in a property that is greater than, or equal in value to the property being sold.  If you purchase something of lesser value, you risk a prorated tax liability.

Title Holder:  The title-holder of the initial property must be the title-holder on the new property until after the exchange.