What is a 1031 Tax-Deferred Exchange?
Tax-Deferred Exchanges were first introduced in 1921 allowing owners of investment property to defer the payment of capital gains associated with the sale of these properties. This procedure is outlined under the Internal Revenue Code Section 1031, and involves a series of rules and regulations that must be met in order to take full advantage of this great tax benefit. Fox Real Estate Group has a complete understanding of everything that is involved in utilizing this very effective strategy and will walk you effortlessly through the process.
Other Names for the 1031 Procedure1031 Tax-Deferred Exchanges are also commonly known as:Starker Exchange Like-Kind Exchange Tax-Free Exchange Real Estate Exchange Delayed Exchange 1031 Exchange Non-taxable Exchange Real Property ExchangeThough all of these terms refer to the same thing, the most typical term used by the industry today is Tax-Deferred Exchange.
Background of tile 1031 Exchange
When income taxes were first imposed in 1918, gain or loss recognition was required on all disposition of property. Provision for non-recognition of gain or loss on the exchange property was introduced in 1921. Since inception, there have been five major amendments made to the Tax-Deferred Exchange as we know it today.
What Types of Property Qualify?
Section 1031 provides that gain or loss is not recognized when property held for productive use in investment, business or trade, is exchanged for "like-kind" property to be held for the same purpose. Any property held for this purpose, which is not your primary residence, is eligible for exchange. Under a mix-property scenario, like an owner occupied apartment building, an exchange is still possible. The exchangeable portion will be that portion of the building leased out.
The definition of what is "like kind" for real property is broad. Any real estate held for investment purposes is eligible for exchange. These properties include commercial real estate, rental property, bare land, apartment buildings, etc.
Other Exchangeable Property
Personal property held for productive use in investment, business or trade may also be exchanged for "like-kind" or "like-class" personal property under IRC 1031. However, the definition for what is "like-kind" or "like-class" for personal property is much more restrictive. For example, while improved real estate may be exchanged for unimproved real estate, a car may not be exchanged for a truck. Please refer to Aircraft/Business Exchanges
Types of Exchanges
There are many different types of exchanges afforded to you under the code. Knowing which one is right for you depends on your particular needs. Be assured that whatever those needs are, Fox Real Estate Group will help you determine the best type of exchange to fit them. The following gives brief descriptions of the different exchanges available.
The most commonly used exchange is the Delayed Exchange also known as the Starker Exchange. The process of a Delayed Exchanged begins upon the close of escrow of the relinquished property. From that close, you will have a maximum of 45 days to identify up to three potential properties that you wish to exchange for. After the 45-day period, the code extends to you an additional 135 days to complete the purchase of one or all three of those properties identified. Fox Real Estate Group provides you with all the documentation and guidance to help make this process hassle-free.
You may consider a simultaneous exchange when you have already identified a property or properties you wish to exchange for, prior to the closing of escrow of the relinquished property. In this scenario, the two properties will be exchanged concurrently. Because some risks and timing complications may arise, investors typically call on a Qualified Intermediary for assistance in doing this type of transaction. By doing so, an exchanger avoids the possibility of having their exchange disallowed due to having unrestricted control (constructive receipt) of the proceeds from the property sold. A Qualified Intermediary will act on your behalf as the controller of these proceeds as you complete the legal process. However, you will still maintain full discretion of how the proceeds are handled. You can rest assured that a Qualified Intermediary can prudently and effectively manage your funds with the help of our strategic banking partners and a faultless accounting system.
Often, the investor will want to make improvements to the replacement property and have the cost of the improvements included in the exchange value of the replacement property. The improvements may consist of repairs or remodeling of an existing building, or the construction of a new building on raw land. It is important to know that all improvements should be completed and the exchange estate dispersed within the 180-day time period. As a result, these types of exchanges have to allow for certain uncalculated risks to arise. Advance planning is critical in conducting an improvement/build-to-suit exchange. Our knowledgeable consultants are not only experienced in handling these type of exchanges, but will also make sure your plans for this exchange are carried out in the most efficient manner.
A Reverse Exchange offers unique advantages for exchangers who want to find a replacement property before they sell the investment property they currently own. This legal procedure was expanded upon and new revenue procedures were added in October of 2000. An exchanger can now purchase the desired property without the time restrictions found under other types of exchanges. Fox Real Estate Group will help you by acquiring title to that new property, allowing enough time for the old one to close. We will essentially hold on to that property until you are ready to make the exchange. Please see Reverse Exchanges, a Brief Overview for more details.
The most commonly exchanged personal properties are aircraft and business. As stated previously, although certain exchanges of these natures are allowed, the rules for them are much stricter. For these exchanges, the term "like-kind" has a much narrower definition than that of a real estate property exchange. Both the relinquished and replacement property must fall within the same General Asset Class or Product Class. The idea behind this can be best understood through a few examples rather than a detailed explanation. A corporate jet can only be exchanged for another corporate jet, not a commercial aircraft. A restaurant can only be exchanged for another restaurant, not a nightclub. Even though both properties being exchanged are quite similar, the classifications are in fact quite different. Thus, these types of exchanges are ineligible for tax-deferred exchanges. As with many aspects involving tax-deferred exchanges, it is critical that you receive proper guidance before proceeding. Fox Real Estate Group will always provide free consultation and help you coordinate your transaction.
Can You Do a 1031 Exchange after the Close of Escrow on the Relinquished Property?
No. Once you have closed escrow and the closing agent has disbursed the funds, it is presumed that you have constructive receipt of funds even if you have not cashed the check. In order to do a 1031 exchange, you must have Fox Real Estate Group involved prior to close of escrow on your relinquished property.
Who Qualifies for the 1031 Exchange?
If you are an owner of investment property, you may be able to take advantage of this law and save on the state and federal capital gains taxes associated with the sale of your investment property.
How a 1031 Exchange Can Benefit You
The 1031 exchange process allows owners of investment property to diversify their real estate assets. An investor can choose to sell a small investment property for a larger property or vice versa. Investment property owners also have the option to exchange one property for several properties, or merge several properties into one. Investors can achieve geographical diversity by exchanging their real estate holdings anywhere in the United States. There are many choices and opportunities available and Fox Real Estate Group will help find the best fit for you.
45-Day Time Period
An exchanger has 45 calendar days from the close of escrow on the relinquished property to identify up to three investment properties. Certain restrictions apply if an exchanger would like to identify more than three properties, and they should first contact Fox Real Estate Group for details.
How to Identify Exchange Property
An exchanger formally identifies replacement property by submitting a written form to Fox Real Estate Group indicating each property they intend to purchase. This form can be mailed, hand-delivered or faxed to Fox Real Estate Group's office. The exchanger may also choose to identify additional properties that they would consider to be in "back up" position. Call Fox Real Estate Group for details.
180-Day Time Period
Once the 45-day time period has lapsed, the exchanger has an additional 135 days to close on any and all replacement properties. The combined 45 days to identify and additional 135 days to close constitutes a total of 180 days to complete an exchange transaction. Please take note that if you close escrow on the sale of your investment property after October 15th, you will need to file a tax extension to use the full 180-day benefit.
Want EXPERIENCED 1031 Service? Fox Real Estate Group has First Hand Knowledge
If you want someone to sell your residence, that's one thing. Investing in income-producing real estate is not the same as buying and selling your home. If you want someone to help you with knowledge AND experience with the DETAILS of an investment property exchange, then Fox Real Estate Group is the place to turn to for help. We've done mulitple investment property exchanges within the very exacting and strict guidelines of IRS Code Section 1031. Some agents know about 1031 exchanges; we've DONE them.
Fox Real Estate Group understands investment real estate, how to buy, how to sell, and how to exchange. Your goal is to raise the value of your assets. We provide services to help you reach your goal. Call us for a private consultation and discuss your objectives. Reach Marty Olson directly at 612-865-6525.
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