§1031 Tax Deferred Exchanges

A 1031 tax deferred exchange under §1031 of the Internal Revenue Code (IRC) is the most common form of a §1031 exchange, allowing a taxpayer to sell their investment or business property and then acquire a new "like-kind" property at a later date, with the goal of deferring capital gains taxes.

Unlike a 1031 simultaneous exchange, where the two properties are swapped at the same time, a 1031 tax deferred exchange allows for a delay between the sale of the relinquished property and the acquisition of the replacement property. The IRS provides specific guidelines and time limits that must be followed for the exchange to qualify for tax deferral.

With over 30 years in the industry, our 1031 exchange intermediary experts can help ensure all these requirements and guidelines are met with a plan that best suits your needs. Contact us today online or by phone at 314-822-8100 to request a free consultation and get started developing your strategy.

Key Steps and Requirements for a 1031 Tax Deferred Forward Exchange:

• Sale of the Relinquished Property: The 1031 tax deferred exchange process starts with the taxpayer selling the property they currently own (referred to as the relinquished property).
• Use of a Qualified Intermediary (QI): To comply with the IRS’s "safe harbor" regulations, the taxpayer must not have direct control over the sale proceeds. A Qualified Intermediary (QI) is used to hold the proceeds from the sale in escrow until a replacement property is identified and acquired. This ensures the taxpayer does not take constructive receipt of the funds.
• Identification Period (45-Day Rule): After the sale of the relinquished property, the taxpayer has 45 daysto formally identify potential replacement property or properties. The identification must be made in writing to the QI and follow specific IRS guidelines. The real estate must be located in the U.S. (including U.S. territories).  A taxpayer can identify up to:
  1. Three properties without regard to their value, or
  2. More than three properties, as long as the total value of all identified properties doesn’t exceed 200% of the value of the relinquished property.
  3. An unlimited number of properties so long as the taxpayer acquires 95% or more of the identified property or properties.
• Replacement Period (180-Day Rule): After the sale of the relinquished property, the taxpayer has 180 days (or the due date for the taxpayer’s return, whichever occurs first) to close on one or more of the identified replacement properties. The replacement property must be of "like-kind" and must be acquired within this timeframe.
• Like-Kind Requirement: Both the relinquished property and the replacement property must be held for productive use in a trade or business or for investment purposes. Personal-use properties like a primary residence do not qualify.
• No Constructive Receipt: The taxpayer cannot have direct access to or control over the sale proceeds during the exchange. This is requirement is set forth in the 1031 tax deferred exchange agreement and a key reason the Qualified Intermediary is involved.
• Tax Deferral: If all IRS guidelines are followed and the transaction is properly structured, the taxpayer can defer capital gains taxes on the sale of the relinquished property.

Example of a Tax Deferred Forward Exchange:

1. Day 1: The taxpayer sells their investment property (relinquished property) for $500,000. The proceeds are held by a Qualified Intermediary.
2. Day 45: By this day, the taxpayer has identified three potential replacement properties.
3. Day 1 to 180: The taxpayer closes on one of the identified properties, which costs $500,000. The proceeds from the sale of the relinquished property are used to purchase the replacement property.

Advantages of a 1031 Tax Deferred Exchange:

• Tax Deferral: Defer capital gains taxes on appreciated real estate, freeing up more capital for investment in new properties.
• Flexibility: The taxpayer has more time to find a suitable replacement property, unlike a simultaneous exchange.

However, the deferred exchange must be carefully planned and managed to meet all IRS deadlines and requirements. Failure to follow the safe harbor regulations will disqualify the exchange, resulting in the taxpayer having to pay taxes on the sale.

Contact 1031 Exchange Intermediaries for Your Deferred Forward Exchange

A 1031 tax deferred exchange offers significant advantages for investors, primarily allowing the deferral of capital gains taxes when selling investment or business property. This strategy frees up more capital for reinvestment, enabling you to grow your real estate portfolio without the immediate tax burden.

At 1031 Exchange Intermediaries, we have over 30 years of experience guiding clients through the complexities of the 1031 tax deferred exchange process. Our knowledgeable team will ensure that you meet all IRS guidelines and deadlines, maximizing your benefits. Contact us today for a free consultation and let our 1031 exchange intermediary team develop a strategy tailored to your investment goals!