You can use a Section 1031 exchange with commercial real estate. In fact, Section 1031 exchanges are frequently used by investors looking to defer capital gains taxes when selling commercial or investment properties. Under Section 1031 of the Internal Revenue Code, the taxpayer can defer taxes on capital gains by reinvesting the proceeds from the sale of a commercial property into another like-kind property.
Want to learn more about how a 1031 exchange with commercial property can help you maximize your commercial real estate investments? Contact our 1031 exchange intermediary team today to get started developing your strategy.
Key Requirements for a Section 1031 Exchange with Commercial Real Estate
- Like-Kind Property Requirement: The replacement property must also be used for investment or business purposes. The definition of "like-kind" is broad when it comes to real estate, so various types of commercial properties are considered like-kind to each other. For example:
- You could exchange an office building for a retail center, industrial property, multi-family apartment complex, or even vacant land held for investment.
- Investment or Business Use Requirement: Both the relinquished and replacement properties must be held for investment or business use. Properties used primarily for personal purposes, such as a personal residence, do not qualify.
- Timing Rules:
- 45-Day Identification Period: You have 45 days from the sale of the relinquished property to identify potential replacement properties.
- 180-Day Completion Period: You must complete the purchase of the replacement property within 180 days from the sale of the relinquished property.
- Use of a Qualified Intermediary: To prevent constructive receipt of funds, you must use a Qualified Intermediary (QI) to hold the sale proceeds and facilitate the exchange.
- Equal or Greater Value Requirement: To fully defer capital gains taxes, the replacement property must have a purchase price equal to or greater than the sale price of the relinquished property, and all proceeds from the sale must be reinvested.
Example of a Section 1031 Exchange with Commercial Real Estate
Suppose you own an office building valued at $1 million and want to defer capital gains taxes on the sale. You could sell the office building and use a 1031 exchange to purchase a $1.2 million retail center, reinvesting all sale proceeds. By doing this through a 1031 exchange, you can defer capital gains taxes on the sale of the office building.
In summary, Section 1031 exchanges are commonly used for commercial real estate, allowing investors to defer taxes while reinvesting in other like-kind properties for business or investment purposes.
Contact Us to Get Started on Your Exchange
If you’re looking to defer taxes on the sale of commercial property and reinvest in a like-kind asset, a 1031 exchange offers a powerful strategy to grow your portfolio. Whether you’re upgrading, diversifying, or consolidating, a 1031 exchange allows you to preserve capital and maximize your investment potential. Our expert 1031 exchange intermediary team is ready to help you navigate the complexities of 1031 exchanges for commercial properties, ensuring you meet all requirements and develop the best tax strategy. Contact us today to get started and take your commercial real estate investments to the next level!
