What is a 1031 Exchange?

Section 1031 of the Internal Revenue Code provides that no gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment if such real property is exchanged for real property of like-kind to be used either for productive use in a trade or business or for investment.

Simply put, an exchange is the sale of a business use or investment property followed by the acquisition of another linked together by paperwork and completed within the set time periods. They have been part of the tax code since 1921 and are based on the continuity of investment, encourage reinvestment and are good for the economy.

Maximizing your Tax Deferral

To maximize your tax deferral, you must acquire replacement property of equal or greater net value and equity. The value of the relinquished property is its net selling price which is the contract sales price less routine transaction expenses. The equity in the relinquished property is the net after all routine transaction expenses and mortgage payoff(s). A trade down in value or equity creates a taxable event known as “boot.”  You are taxed on the greater trade down (value or equity). You should always discuss your situation with a tax and/or legal professional before proceeding with a 1031 exchange.

Frequently exchanged types of property include the following:

  • Farms, ranches and vacant land
  • Office buildings
  • Duplexes, single family rental properties and multi-family properties
  • Warehouses and industrial buildings
  • Shopping centers and retail properties
  • 30-year leases, including options
  • Conservation easements
  • Billboard, cell tower and utility easements
  • Triple Net Lease (NNN) properties
  • Tenant-in-common interests (TICs)
  • Delaware Statutory Trusts (DSTs) information
  • Timber rights
  • Water rights
  • Co-ops
  • Air rights
  • Oil and gas royalties and mineral rights

A great resource for more information: 

https://www.1031corp.com/1031-exchange-basics

Reach out to your local real estate agent if you have questions about the process!

 

 

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