Section 1031 Exchanges

Many successful real estate investors take advantage of Section 1031 Exchanges.

A 1031 Exchange can best be described as a real estate sale without immediate tax implications.  This benefits the seller by providing a window of opportunity to replace the sold real estate with a like-kind property and reduce the tax basis of the replacement property by the deferred gain.  This defers the tax on the property to a future date.

For example, if XYZ Company sells a real estate asset and realizes a gain of $100,000, the company can defer this gain on the sale of the property by executing a 1031 Exchange. In order to do this, XYZ Company could acquire a replacement property for $200,000.  Then to defer the gain, XYZ Company must reduce the basis of the replacement property:

New Property Value: $200,000
Minus Deferred Gain: -$100,000
Basis of Replacement Property: $100,000

However, to be able to execute this exchange, the property must be exchanged for “like-kind” property.  Like-kind properties encompass a wide range of property types.  For example, an office building can be exchanged for a piece of land and vice versa.  Real estate cannot be exchanged for a partnership interest of an entity that holds real estate.

As mentioned earlier, there is a window of opportunity in identifying and acquiring the like-kind property.  The property must be identified no later than 45 days after the taxpayer transfers property.  The taxpayer must also take title either within 180 days of the transfer or by the due date for the taxpayer’s tax return for the tax year in which the transfer of property occurred.

1031 Exchanges can be a great way for real estate investors to invest proceeds from the disposition of real estate into new investments while deferring the tax implication to a later date.  When determining if a 1031 Exchange would work for you, please consult a CPA or legal counsel that has prior experience in handling this type of transaction.

If you are a real estate owner or buyer interested in executing a 1031 exchange, contact the Black Diamond Realty team of professionals to assist with the transaction.  Our real estate team is experienced in strategically aligning 1031 exchange buyers and sellers and positioning their properties for purchase and sale.  Call (304) 413-4350 for more information or you may e-mail me at: RSmyth@BlackDiamondRealty.net.

Source: Rosenfeld, Joel (2014) Principles of Real Estate Accounting and Taxation.  San Diego, CA: Cognella, Inc.