Top 1031 Exchange Reminders You Need to Know
Labor Day has come and gone and kids are back in school. Let’s ‘Start School Smart’ with our top back-to-school 1031 tips. Here are our key reminders when considering a 1031 Exchange.
- 1031 Exchanges are used to defer taxes on investment real estate.
- 1031 Exchanges are a commonly used tax strategy. Section 1031 is not a tax loop hole or tax avoidance (taxes are deferred). Section 1031 has existed for almost a century and is a very important stimulus of the economy of the United States.
- 1031 Exchanges allow taxpayers to defer federal capital gains tax, most state taxes, tax on unrecognized gain due to depreciation, depreciation recapture tax and the net investment income tax imposed by the Affordable Health Care Act.
- As a general rule, to fully defer payment of taxes, taxpayers should purchase replacement property with a value equal to or greater than the property that is being sold (Relinquished Property) and reinvest all net proceeds into that new property (Replacement Property). If the taxpayer purchases property of lesser value or doesn’t reinvest all proceeds, the difference is considered taxable boot and the exchange becomes a Partial Exchange with partial tax deferral.
- 1031 Exchanges follow strict time limits. Once the Relinquished Property (old investment property) is sold, taxpayers have a total of 180 days to acquire Replacement Property (exchange period). In addition, the taxpayer must identify potential Replacement Properties within the first 45 days of that 180 day period.
- Taxpayers may acquire a beneficial interest in properties owned by Delaware Statutory Trusts. Such investments do not require investors to have management responsibilities.
- To avoid having a taxable event, taxpayers may not have actual or constructive receipt of the proceeds from their Relinquished Property(s) sale.
- Exchanges between related parties are permitted, however, specific rules must be followed.
- Unless taxpayers are “swapping real estate” without any money being transferred, the services of a Qualified Intermediary (QI), such as IPX1031, is required. A QI provides, documentation and secures the taxpayer’s funds during the exchange period.
- QIs are not regulated by the federal government nor by most state governments. Therefore, it is essential that taxpayers ascertain the competency of and security provided by a potential QI.
- 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, reduce operating expenses, increase appreciation potential, obtain less management intensive property, relocate an investment and exchange for a property that can be used in the taxpayer’s business.
- Taxpayers should always seek advice from their financial planner, tax attorney and CPA relating to their specific tax and investment goals and situation.
- Start with the right Qualified Intermediary. Choose one (like IPX1031) that has extensive experience, attorneys, CPAs and 1031 professionals on staff, provides financial security and insurance, and that has safeguards in place to protect exchange funds.
Please feel free to reach out to one of your local IPX1031 experts to discuss the possibility and feasibility of your or your client’s next 1031 Exchange.
IPX1031. The best choice for your 1031.
IPX1031 is the largest and one of the oldest Qualified Intermediaries in the United States. As a wholly owned subsidiary of Fidelity National Financial (NYSE:FNF), a Fortune 300 company, IPX1031 provides industry leading security for your exchange funds as well as considerable expertise and experience in facilitating all types of 1031 Exchanges. Taxpayers’ funds are held in segregated accounts at large stable banking institutions in the United States. Our nationwide staff, which includes industry experts, veteran attorneys and accountants, are available to help you and your legal and tax advisors. For additional information regarding IPX1031 and questions on 1031 Exchanges, please review: