Whenever you sell business or investment property and you have a gain, you generally have to pay tax on the gain at the time of sale. IRC Section 1031 provides an exception and allows you to postpone paying tax on the gain if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange. Gain deferred in a like-kind exchange under IRC Section 1031 is tax-deferred, but it is not tax-free.
1031 investments can include like-kind property exclusively or it can include like-kind property along with cash, liabilities and property that are not like-kind. If you receive cash, relief from debt, or property that is not like-kind, however, you may trigger some taxable gain in the year of the exchange. There can be both deferred and recognized gain in the same transaction when a taxpayer exchanges for like-kind property of lesser value.
Contact a Corcapa 1031 Advisor for more information 1031 Exchange and Investments in the form of TIC Properties and DST Properties.
1031 Exchange Qualifications
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.
1031 Exchange Structures
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.
Qualified Properties of a 1031 Exchange
The property you sell and the replacement property you purchange 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 are:
- Delaware Statutory Trusts (DST)
- Tenants in Common (TIC)
- Residential Property
- Commercial Property
- Oil and Gas
1031 Exchange Time Limits
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.
Due Diligence is conducted on multiple levels by the sponsors, broker dealer DAI Securities, LLC and our branch Corcapa 1031 Advisors. We review third party property reports on the property: Appraisal, Property Condition Report and Environmental Reports. If there are any concerns raised from these reports follow up reports are requested. The Private Placement Memorandum or Prospectus is reviewed in detail at the Corcapa Branch level.
DAI Securities, LLC and Corcapa 1031 Advisors also reviews required independent third party reports which contain subject and competitive property information as well as an understanding of risks associated with each investment.
Should these offerings pass our due diligence review, they are approved and may then be shown to investors for consideration. Of course, even the most advanced due diligence process cannot guarantee success and investors must review offering materials in detail to understand all the risks and benefits of a program.
All real estate has risks, including if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions (or rent). If a property fails, there is a possibility the investor could face depreciation recapture and resulting tax.
Consult a tax professional or refer to IRS publications listed below for additional assistance with IRC Section 1031 Like-Kind Exchanges.
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