Significant Considerations For Your 1031 Deferred Exchange

By executing a 1031 deferred exchange rather than a traditional sale you are able to build equity and wealth and save money on taxes. When a 1031 tax exchange is completed, the exchangers sell their investment properties, use the equity to purchase a 1031 replacement property of equal or greater value and leverage the equity into the new property. In a 1031 deferred exchange, the investor will not have to pay taxes on any of the proceeds of the sale if it is all reinvested into a new property. This allows an exchanger to sell an older property that is not maximizing their investment dollars (for example, a structurally obsolete house for which it is hard to find good, dependable renters) and replace it with a property with more potential to appreciate and greater ease of management (for example, a NNN fast food restaurant).

The exchanger must plan ahead to enter into a 1031 deferred exchange. The first step is the exchanger finds a Qualified Intermediary (QI) and they enter into an exchange agreement. The agreement will stipulate that the QI acquires the property to be sold from the exchanger and transfers it to the buyer by direct deed from the exchanger. The QI holds all the funds (cash or otherwise) from the sale in a safe account. Than the QI uses these funds to acquire the 1031 replacement property from the sellers and transfers it to the exchanger by direct deed. Thus the 1031 deferred exchange is complete.

Two requirements must be fulfilled for the 1031 tax exchange to be successful.

• The exchanger must purchase a 1031 “like kind” replacement properties
• Cash or any other benefit cannot be received by the exchanger or they will have to pay 1031 capital gains tax on any benefit they receive.

More Deferred 1031 Exchange Facts :

• There are strict deadlines in exchanges such as 45 days after the sale of the relinquished property the exchanger must identify the property/properties they plan to use to replace the one just sold. They must deliver to the QI (or other party as permitted by the IRS when dealing with a 1031 tax free exchange) in writing the list of potential replacement properties and must purchase replacement properties from this list.
• The purchase of the replacement properties must be completed within 180 days of the closing of the relinquished properties.
• The sold property must have been used for business or investment purposes and exchanger must have the same intentions for the new properties.
• To avoid paying 1031 capital gains, the exchanger should…
  • purchase a property or properties that are equal to or greater than the value of the property sold
  • use all the equity acquired from the sale of the relinquished property towards the purchase of the 1031 replacement properties.
  • obtain the same or greater debt on the replacement property that was on the relinquished property.

For more information about your 1031 deferred exchange speak to your accountant or lawyer. For help in finding the best replacement 1031 property for your 1031 deferred exchange, speak to one of Westwood Net Lease Advisors.