With the new school year starting, timing is perfect for a 1031 Exchange refresher! 1031 Exchanges are once again an important strategic investment tool for many investors and businesses as the real estate investment market’s momentum continues to escalate. Following are key review points when considering a 1031 tax-deferred Exchange:
1. 1031 Exchanges are used to defer taxes on investment real estate and personal property. Some personal property examples are business equipment, farm machinery, franchise rights, corporate jets, livestock, boats, trucks, fleets of autos, buses, race horses, artwork, collectibles, musical instruments, and distribution routes.
2. 1031 Exchanges simply defer taxes. Section 1031 is not a tax loop hole or tax avoidance, but sound tax code that has been used for almost a century to promote the US economy.
3. 1031 Exchanges allow taxpayers to defer capital gains tax, depreciation recapture tax, and the investment income tax imposed by the Affordable Health Care Act, and state tax.
4. To completely defer payment of any capital gains taxes, taxpayers need to purchase new property with a value equal to or greater than the property that is being sold. In some cases the taxpayer may purchase a property of lesser value and still defer a significant amount of tax.
5. 1031 Exchanges follow strict time limits. Once the Relinquished property is sold, generally speaking, taxpayers have a total of 180 days to purchase Replacement property. The taxpayer must identify the new property(ies) that they will purchase within the first 45 days of the 180 days.
6. Exchanges between related parties are allowed but specific rules must be followed.
7. Taxpayers must utilize the services of a Qualified Intermediary (QI), such as IPX1031®, when participating in a 1031 tax-deferred Exchange. The QI provides guidance, documentation and secures the taxpayer’s funds between the sale and purchase of properties.
8. QIs are not regulated by the Federal government and most State governments. Therefore, it is up to taxpayers to ascertain the competency and safety of their chosen QI. Questions that taxpayers should ask include:
• Who owns the 1031 QI and how financially stable are the owners?
• What criteria does the 1031 QI use to pick its depository banks?
• Does the QI have a Fidelity Bond, Errors and Omissions insurance and a Corporate Guaranty?
9. There are many non-tax reasons to exchange. 1031 Exchanges can be used as an estate planning tool, to diversify or consolidate portfolios, to increase cash flow, to set a new depreciation schedule or to exchange out of fully amortized properties.
10. Taxpayers should always seek tax advice from their financial planner, tax attorney or CPA for their specific tax and investment goals and situation.
Investment Property Exchange Services, Inc. (IPX1031®) is the leading national Qualified Intermediary providing a full range of tax-deferred exchange services including forward, reverse and build-to-suit transactions. We look forward to helping you and/or your clients maximize qualifying investments through a 1031 Exchange strategy. Visit www.ipx1031.com for more information or contact us with any questions.
