1031 Exchanges: What You Need to Know
Thanks to IRC Section 1031, a properly structured 1031 exchange allows an investor to sell a property, to reinvest the proceeds in a new property and to defer all capital gain taxes. IRC Section 1031 (a)(1) states:
“No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment, if such property is exchanged solely for property of like-kind which is to be held either for productive use in a trade or business or for investment.”
1031 EXCHANGE – SET-UP – IDENTIFICATION PERIOD
1031 exchanges allow investors to defer capital gain taxes as well as facilitate significant portfolio growth and increased return on investment. In order to access the full potential of these benefits, it is crucial to have a comprehensive knowledge of the exchange process and the Section 1031 code. Investors that familiarizes themselves with 1031 Exchanges, know about the 45 day and 180 day rules. The taxpayer has 45 days from the date that the benefits and burdens of ownership in the relinquished property are transferred to identify a replacement property and 180 days from the transfer of the relinquished property to close on the replacement property or properties which were previously identified.
1031 EXCHANGE – UP-LEG REQUIREMENTS – CLOSING
With relation to the up-leg property requirements, the general rule is that, in order to have a fully tax deferred exchange, the exchangor must trade equal or up in equity and equal or up in fair market value. The effect of this rule is that the exchangor must use the entire net proceeds from the relinquished property as down payment on the replacement property. Also, the exchangor must replace any mortgage paid off at the sale of the relinquished property with an equal or greater mortgage on the replacement property. Any cash received by the exchangor whether at the sale of the relinquished property or at the purchase of the replacement property will be deemed “cash boot” and tax will be recognized to the extent of gain. This rule applies regardless of the exchangor’s cash position in the relinquished property. Regardless of the size of the exchangors down payment, principal pay down, or capital improvements on the relinquished property, the exchangor will be treated as having received “cash boot” if cash is received as part of the exchange. The fair market value of the relinquished property can be calculated from the selling price by subtracting from the selling price the transaction costs of the sale. These transaction costs are limited to those costs directly related to the sale of the relinquished property. The most common transaction costs are brokerage fees, title insurance fees, exchange service fees, and recording fees.
The Executive Team of Encore Real Estate Investment Services has been involved in the Exclusive representation of spearheading over $1 Billion dollars’ worth of successful 1031x assignments for buyers and sellers alike. Our team of specialist understand the intricate framework associated with the policies and procedures of IRC Section 1031. We look forward to discussing the opportunity to work with you on your next 1031 exchange regardless of how simple or complex