1031 Exchanges

Fact Sheet: Tax Deferred Real Estate Exchanges

By using a tax-deferred §1031 exchange, an investor can defer the recognition of capital gains tax that would ordinarily be assessed on the sale of investment property, and use the entire amount of the equity in an essentially “tax-free” sale to purchase substantially more replacement property. To qualify as an exchange, the relinquished and replacement properties must be qualified “like-kind” properties (“like-kind” refers to the nature of the investment), and the transaction must be structured as an exchange.

What property qualifies?
Any property held for productive use in a trade, business or investment can be exchanged for like-kind property, and any type of investment property can be exchanged for another type of investment property. For example, a single-family rental can be exchanged for a five-unit apartment building. An office building can be exchanged for a retail building. Any combination of investments will work, so long as basic requirements are met.

What are the requirements for a 1031 exchange?
To avoid paying any capital gains tax on an exchange, the investor should observe the following guidelines:

  • Purchase property of equal or greater sales price than the property sold (the “relinquished property”).
  • Use all of the net equity from the relinquished property to acquire the replacement property.
  • Obtain equal or greater debt on the replacement property.

The investor has 45 days from closing on the relinquished property to identify the replacement property – in writing – and a maximum of 180 days to close on the replacement property.

Why 1031 exchange?
In addition to deferring payment of capital gains tax, exchanges offer the investor a large number of non-tax opportunities. For example:

  • Increase leverage – Use the tax dollars saved by an exchange to purchase investment property of greater value.
  • Increase depreciation deduction – Exchange property with improvements nearing the end of their useful lives for property with newer improvements.
  • Reduce management obligations – Exchange several difficult to manage rental properties for one large professionally managed rental property.
  • Provide for estate and retirement planning – Exchange one large property for multiple properties to leave to heirs.
  • Improve cash flow – Exchange raw land for improved property with a positive cash flow.
  • Increase appreciation – Exchange commercial property for other property that will appreciate in value more quickly.

What is a Qualified Intermediary?
A Qualified Intermediary ensures the exchange’s successful completion by coordinating and documenting the transaction.  Avenue Settlement Corporation no longer acts as a Qualified Intermediary, which provides the investor with the “Safe Harbor” protections against actual or constructive receipt of funds, as required by §1031. The fee for a 1031 Exchange QI typically ranges from $950.00 to $2,500.00, depending upon the complexity of the transaction.

For more information on issues concerning this topic or to locate a Qualified Intermediary, check the following links: