What Is A 1031 Exchange

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What is a 1031 Exchange?

A 1031 tax-deferred Exchange, also known as a “like-kind” Exchange, is the exchange of real estate, held for investment, rental or used in trade or business, for other real estate purchased with the intent to be used for investment, rental, or used in trade or business. A successful completion of a 1031 Exchange allows investors to defer payment of Federal capital gains taxes, state ordinary income taxes and depreciation recapture otherwise realized from the sale of investment property. In order to defer payment of all capital gains taxes, the exchangor must follow strict rules set forth by the IRS. Like-Kind Exchanges are named after Section 1031 of the U.S. Internal Revenue Code.

Key Criteria Of A 1031 Exchange

  • The taxpayer must purchase a replacement property of equal or greater value to the property(s) relinquished in the exchange.

  • The properties exchanged must be considered “like-kind” by the IRS and meet the Qualified Use standard.

  • There are important timeline requirements the exchangor must adhere to in order to complete a 1031 Exchange. The 1031 Exchange must be completed within 180 calendar days. This means the exchangor must close on all replacement properties within 180 days from selling their relinquish property. The exchangor must identify any potential replacement property during the first 45 calendar days of the exchange process. These deadlines are absolute and cannot be extended for any reason, unless otherwise stated by the IRS.

  • To ensure compliance with IRS regulations, a qualified intermediary is involved to hold the exchange proceeds and facilitate the transaction.

Benefits Of A 1031 Exchange

  • Flexibility: 1031 Exchanges allow investors to upgrade or diversify their real estate portfolio both geographically and/or by property type.

  • Portfolio Expansion: By deferring taxes with a 1031 Exchange, Investors can utilize more of their capital to expand their investment properties.

  • Tax Deferral: Real estate investors can significantly decrease their overall tax burden using a 1031 Exchange.

  • Tax Planning Strategy: 1031 Exchanges can be a valuable financial planning tool.

Due to the complexities of 1031 Exchanges, careful planning, adherence to IRS regulations, and professional guidance are essential for a successful 1031 Exchange. It is always advised that the taxpayer seeks guidance from a qualified tax advisor, an experienced real estate professional, and/or Qualified Intermediary, such as Gibraltar 1031 Exchange, with experience in 1031 transactions.

Simultaneous Exchange

In this basic 1031 Exchange, the relinquished property closes on the same day the replacement property is purchased, with concurrent closings.

Delayed Exchange

The most popular exchange. Investors sell their relinquished property and then purchase their replacement property(s) within the exchange timeline.

Reverse Exchange

The reverse exchange allows the taxpayer to purchase the replacement property prior to the close of the property they are selling.

Improvement Exchange

Known as a construction or build-to-suit exchange. Exchange funds are used to build on/make improvements to the replacement property.

Why Do A 1031 Exchange?

When an investor sells an investment property, chances are that they are looking at a large amount of
capital gains taxes. By utilizing a 1031 Exchange, a large portion, if not all, of that tax liability is able to
be deferred so that the taxpayer can keep their equity to reinvest in another investment property. In
investment language – the money saved by not paying the taxes allows the investor to purchase that
much more real estate. An exchanger can continue to 1031 exchange throughout their lifetime in order
to permanently defer their capital gains taxes.

With the help of Gibraltar 1031 Exchange, an exchange is an vital wealth-building, tax-saving investment
strategy.

Your qualified intermediary

Gibraltar 1031 Exchange is available to guide you through the entire exchange process.

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