What is a 1031 Exchange?

A 1031 Exchange, also known as a like-kind exchange, or 1031 Tax Deferred Exchange, is an effective tool for investment real estate investors that allows you to sell a certain property and defer the payment of your federal, and in most cases, state depreciation recapture and capital gain income tax liabilities by exchanging the sold property for a qualified replacement property.

By using all the proceeds from the sale, including the tax savings, a properly structured 1031 Exchange allows you to facilitate the growth of your real estate portfolio, increase your return on investment, and or reposition your current equity into other types of investment real estate assets.

In order to access the many benefits of a 1031 Exchange, it is important to have a thorough understanding of the exchange process and the Internal Revenue Code 1031. For instance, a common misunderstanding of a 1031 Exchange is that a “like-kind” replacement property means purchasing the same exact type of property that was sold. The truth is, some of the types of properties that are eligible for 1031 Exchange are single-family rental homes, shopping centers, single-tenant net lease properties (NNN property), multifamily and or apartment buildings, industrial buildings, commercial office buildings, and hotels. In general, any type of real estate may be traded for another type of real estate as long as the property that has been sold, or will be purchased, will be held for income production (rental), investment purposes. This fact alone can reveal other opportunities that might have been dismissed or overlooked.

It is important to consult with your legal and tax advisor to determine whether your property will satisfy the 1031 Exchange requirements.

Common 1031 Exchange Rules:

1. The way you held title to the property you sold, must be the same title record on the replacement property. The owner of the relinquished property must be the owner of the replacement property.
2. All profits and proceeds from the sale of the property must be reinvested. In other words, the value of the replacement property must be equal to or greater than the value of the sold property.
3. Your replacement property must be held for “business or investment purposes.” You can exchange for one or multiple properties or exchange from residential to commercial real estate assets.
4. The 1031 Exchange deadlines consist of a 45-calendar day identification period and a 180-calendar day (or less) exchange period.

Popular 1031 Exchange Strategies

1. Tax Shelter – Exchange a fully depreciated apartment building for a higher valued property for a new depreciation schedule and tax deduction.
2. Management Relief / Lifestyle Change – Exchange an apartment building for a property requiring less management, with passive income, in order to travel more and simplify one’s life.
3. Cash Flow – Exchange an already appreciated apartment building for a higher cash flowing property.
4. Appreciation – Exchange a cash flow property for a property with long-term appreciation potential. For investors who do not need the cash flow now but desire to build their estate.
5. Consolidation – Exchange from several smaller rentals into one larger property to consolidate the benefits of ownership and management, or exchange from a larger property to a smaller one for retirement reasons.
6. Location – Exchange an out of the area apartment building for one closer for easier management or exchange an apartment building from a tough neighborhood for one in a more desirable location.

1031 Exchange Services at Investment Capital Real Estate

Our team of professionals will be your partner through the entire 1031 Exchange to help you meet your investment real estate goals. Our unique process will give you the confidence that you will find a replacement property that meets your investment objectives.

Contact Investment Capital Real Estate today to schedule a consultation or a quick call, to discuss your investment objectives.