Some of the benefits of selling or exchanging your investment properties are:
- Exchange for a larger, more expensive one therefore increasing cash flow and greater earnings potential.
- Exchange for several properties or several properties for one property.
- Increase depreciation for tax sheltering purposes on a building on for several years.
- Improve the quality of an investment property.
- Decrease or better yet, entirely eliminate management responsibility.
- Relocate to another area of the country, (you can exchange anywhere in the USA)
- Estate Planning flexibility.
What Properties Qualify for a 1031 Exchange?
“Like for Like” – any properties owned but not used for the investors’ primary residence. A few examples are:
- An Apartment building for a Commercial building or a single tenant triple net property.
- Raw undeveloped land for an office building or warehouse.
- Single tenant rental houses for a net lease retail or industrial property.
- Delaware Statuary Trust, (DST)
In effect, any investment property may be exchanged for any other investment property. What an investor cannot do is trade investment property for a personal residence and vice versa. It is, however, possible to convert a personal residence to investment property by renting it to another party for a period of not less than one year and then exchanging it for investment property.
The basic premise of a 1031 exchange is that it allows sellers of real estate held for investment purposes to “trade up” to a more expensive property and defer all federal income taxes to a later date. This allows the taxpayer (“The Exchanger”) to keep the earning power of the deferred tax dollars working for him or her in another investment.
The Most Common Type of 1031 Exchange
Delayed exchanges are the most common exchange format. Strict statutory rules and requirements exist to obtain 1031 tax deferral. In a Delayed Exchange, a taxpayer must meet a number of time deadlines after closing on the sale of a relinquished property:
- Acquire the replacement property within a maximum of 180 calendar days after closing on the sale of relinquished property, or the day the taxpayer’s tax return is due, whichever is earlier (the “Exchange Period”)
- Either acquire all replacement property or properties or properly identify all potential replacement properties within 45 calendar days from the relinquished property closing (the “Identification Period”).
There are strict guidelines to be followed in order to accomplish a 1031 exchange, and as always, it is important to have the guidance of a qualified, Broker, experienced Attorney and/or CPA before entering into this type of transaction. All aspects of the investor’s unique tax situation and goals need to be evaluated. Some Deferred Statutory Trusts involve other investors, longer hold periods, and not much control of the investment. There may even be times when the tax deferred exchange is not the best option.
It is important for the exchanger to work with a Broker with a wide range of contacts who will be able to produce a sufficient number and variety of replacement properties from which he or she can choose during the 45-day identification. This is another reason to work with only qualified, experienced brokers who have substantial expertise in property exchanges.
Note: The successful sale, purchase or 1031 Exchange of Investment Property is highly specialized and should only be trusted with specialist brokers.
Catherine Robinson is a successful Real Estate Broker, Investor, Author and Entrepreneur. She is a member of the Orange Coast Exchangors, National Council of Exchangors, International Council of Shopping Centers (ICSC), Certified Commercial Investment Member Candidate, and numerous other Real Estate, Investor organizations.
She built her career helping individuals maximize and increase the value of their real estate nationwide including tax-deferred exchanges. For more information call 949-637-2924, email [email protected]