Interested in learning more 1031 exchange rules in Colorado? This guide will provide you an overview of the 1031 Exchange process, the benefits of a 1031 Exchange and common questions people ask when Colorado investors are considering a 1031 Exchange.
The IRS allows Colorado investors to sell rental properties, business properties, and land that was purchased for investment purposes and defer all capital gains taxes via IRC Section 1031. This is one of the most effective tax strategies available in the tax code and can allow investors to grow wealth using continual 1031 Exchange tax deferral strategies.
IRC 1031 is defined as: 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.
Many assume that like-kind exchange means you must exchange from the same type of property to another property of the same type. However, as long as the relinquished property was held for investment, an exchanger could sell their property and reinvest the proceeds in an apartment community, industrial building, storage units, or any real property being used for business or investment purposes.
The property Colorado investors sell and the replacement property they purchase must meet certain requirements to qualify for a 1031 Exchange. Both properties must be held for use in a trade or business or for investment. Both properties must be similar enough to qualify as “Like-Kind.”
Property types that are considered to be “Like-Kind” properties and are eligible for 1031 Exchange in Colorado are:
Any Colorado real estate held for productive use in a trade or business or for investment purposes is considered like-kind. A primary residence would not fall into this category, however, vacation homes or rental properties may qualify.
Land, land improvements resulting from human effort including buildings and machinery sited on land and various property rights over the preceding (ex. homes, apartment buildings, shopping centers, commercial buildings, factories, condominiums, leases of 30-years or more, quarries and oil fields) qualify. All types of real property are considered like-kind and thus exchangeable for all other types of real property in a 1031 exchange.
Investors can 1031 exchange into commercial properties such as industrial and manufacturing facilities like a self-storage facility, distribution facility, retail shopping center, or office building.
Investors can 1031 exchange from farmland into residential multifamily properties or the reverse, where farm owners can sell farmland and reinvest proceeds into residential multifamily communities.
Investors can 1031 exchange into TIC ownership of properties in a variety of asset classes such as self-storage, Amazon or Costco tenanted industrial facilities, or even senior care facilities.
Investors can 1031 exchange from traditional property into oil and gas investments as working interests or royalty interests. We have had clients sell inherited royalty interest owned for decades and reinvest in income-producing multifamily properties.
Owners of investment and business property may qualify for a Section 1031 deferral. Individuals, C corporations, S corporations, partnerships (general or limited), limited liability companies, trusts and any other taxpaying entity may set up an exchange of business or investment properties for business or investment properties under Section 1031.
To accomplish a Section 1031 exchange, there must be an exchange of properties. The simplest type of Section 1031 exchange is a simultaneous swap of one property for another.
Deferred exchanges are more complex but allow flexibility. They allow you to dispose of property and subsequently acquire one or more other like-kind replacement properties.
To qualify as a Section 1031 exchange, a deferred exchange must be distinguished from the case of a taxpayer simply selling one property and using the proceeds to purchase another property (which is a taxable transaction). Rather, in a deferred exchange, the disposition of the relinquished property and acquisition of the replacement property must be mutually dependent parts of an integrated transaction constituting an exchange of property. Taxpayers engaging in deferred exchanges generally use exchange facilitators under exchange agreements pursuant to rules provided in the Income Tax Regulations.
A reverse exchange is somewhat more complex than a deferred exchange. It involves the acquisition of replacement property through an exchange accommodation titleholder, with whom it is parked for no more than 180 days. During this parking period the taxpayer disposes of its relinquished property to close the exchange.
While a like-kind exchange does not have to be a simultaneous swap of properties, you must meet two time limits or the entire gain will be taxable. These limits cannot be extended for any circumstance or hardship except in the case of presidentially declared disasters.
The first limit is that you have 45 days from the date you sell the relinquished property to identify potential replacement properties. The identification must be in writing, signed by you and delivered to a person involved in the exchange like the seller of the replacement property or the qualified intermediary. However, notice to your attorney, real estate agent, accountant or similar persons acting as your agent is not sufficient.
Replacement properties must be clearly described in the written identification. In the case of real estate, this means a legal description, street address or distinguishable name. Follow the IRS guidelines for the maximum number and value of properties that can be identified.
The second limit is that the replacement property must be received and the exchange completed no later than 180 days after the sale of the exchanged property or the due date (with extensions) of the income tax return for the tax year in which the relinquished property was sold, whichever is earlier. The replacement property received must be substantially the same as property identified within the 45-day limit described above.
Speak with your tax and financial advisors before selling your property to make sure a 1031 exchange is right for you.
2. FIND A QUALIFIED INTERMEDIARY (QI)
Choose a QI before you close escrow. They will hold your exchange proceeds during the transaction process.
Do not take receipt of funds – all proceeds must go to the QI or 1031 is invalidated.
3. CHOOSE REPLACEMENT PROPERTY
You have 45 days to “identify” replacement property, and 180 days to close on the relinquished property.
1031 DST Solution presented by Corcapa 1031 Advisors specializes in locating like-kind replacement property at equal or greater value for full tax-deferral.
4. DEBT OR NO DEBT?
The IRS requires matching the debt from your relinquished property with equal or greater debt in the replacement property.
Don’t need debt? You can buy properties with debt or without.
Debt always brings some risk to real estate ownership, but can provide the benefit of increasing depreciable basis and sheltering some cash flow from taxation.
5. PROCESSING & PAYMENT
After you select your replacement property, Corcapa prepares your purchase documents and sends them to you for signature.
Next, sign paperwork with your QI releasing your sale proceeds to the DST escrow account.
6. RECEIVE DISTRIBUTION
After you’ve closed on the replacement property, cash flow distributions are typically made monthly and deposited directly into your bank account.