Definition

Do you own business or investment property? By exchanging properties, as opposed to outright selling/buying them, you can keep more of your money working for you.

Section 1031 of the Internal Revenue Code allows investors to defer their capital gains tax from the sale of a business/investment property by purchasing like-kind real estate of equal or greater value. By executing a 1031 exchange, all proceeds from the sale of the original property can be used towards the purchase of a like-kind replacement property.

Example

John Doe buys an office building for $100,000 in 2006, and sells it for $200,000 in 2016.  John can then purchase a new office building (or similar like-kind investment property) valued at $200,000 (or more) and defer the taxes on his $100,000 capital gain as long as the exchange meets the requirements listed in section 1031 of the Internal Revenue Code ob link to IRC page.

“…keep more of your money working for you.”

Typical Process

1. All 1031 exchanges have the same three basic steps:
2. Investor sells a property and the proceeds are escrowed with Qualified Intermediary link to QI page.
3. Qualified Intermediary transfers the funds to purchase a like-kind replacement property.
4. Investor receives beneficial interest in the form of a DST (Delaware Statutory Trust) link to DST page.

Basic Guidelines

• Seller specifies in the contract that the sale of the property may be in the form of a 1031 exchange.
• Seller does not control the net proceeds from sale of the original property; these must be deposited in a qualified escrow.
• Replacement property must be like-kind to the property that was originally sold.
• Replacement property must have equal or greater value than the original property that was sold.
• Replacement property must be identified within 45 days of sale link to 45 day id page of the original property.
• Replacement property must be acquired within 180 days of sale of the original property.