THE 101 ON 1031 EXCHANGES

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What exactly is a 1031 exchange?

1031 Exchanges, named for IRS Code Section 1031, are popular with net lease investment buyers and sellers and are often critical drivers of deals priced between $1M-$20M. Contrary to popular opinion, the exchanges are not tax-free. They are tax-deferred which allows you to put off paying the capital gains taxes on the proceeds of a property sale and immediately using those funds to purchase another property.

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What do they mean by “like kind?" 

In a 1031 exchange, you will take the proceeds of your property sale and put them toward another “like kind” investment property. “Like kind” is fairly broad and allows you, for example, to sell an income producing apartment building and then exchange it for an income producing retail property. The income producing nature of the real estate makes it “like kind.

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Do I have 45 days or 180 days to make this exchange? 

It is very important to be mindful of the deadlines. Investors often hear they have 180 days to make the exchange but that 180 days involves the first 45 days to identify the replacement property and then another 135 days to close on it. Most 1031 buyers do not take that long from start to finish but the 45 day period is critical.

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Can I only choose one replacement property?

Typically, you can identify up to three properties before settling on one, two or all three. However, there are additional options that allow you to purchase even more properties. In one case, you can choose multiple properties as long as the total price does not exceed 200% of the value of the property you sold. In another case, you can choose more than three properties as long as the purchase price is at 95% or more of the market value. It is best to consult your CPA in understanding what best suits your needs.

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Where do I start?

Our team will help you identify the property or properties that best meet your requirements. We will go over the pros and cons of each investment and advise which ones rise to the top. We always recommend you seek guidance and counsel from your accountant and tax attorney but we can help facilitate and put you in touch with the experts including a qualified intermediary who can ensure your funds are protected and qualify for the exchange. 

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