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1031 Exchange Explained

Irs Section 1031 allows an investment property investor of commerical investment property to exchange commerical investment property and defer paying federal and state capital gain taxes (20%+ applicable state taxes) in the event that they purchase a like-kind commerical investment property. A tax-deferred exchange is a method by which an investment property investors trades one or more relinquished commerical investment properties for one or more replacement commerical investment properties of like-kind, while deferring the payment of federal income taxes and some state taxes on the transaction.

Completing a 1031 exchange with a tenant in common interest ownership in a commerical investment property allows investment property investors not only to defer their capital gains taxes, but to also upgrade their commerical investment property into larger, institutional-grade commerical investment properties. Essentially, 1031 exchanges allow investment property investors to use all of the proceeds from their sale as leverage to gain access to more valuable commerical investment property commerical investment property.

If you are thinking of transferring any commerical investment property, contact us today for more information on 1031 exchanges.

Benefits of a 1031 Exchange

Several benefits befall any 1031 exchange investment property investor, including:

1031 Exchange Benefits

Deferred capital gains taxes

1031 Exchange Benefits

Increased cash flow on a monthly basis is a strong possibility

1031 Exchange Benefits

More money to put as a down payment on your new commerical investment property

Pick and choose the type and location of the replacement commerical investment property that best suites you

1031 Exchange Benefits

Do away with the struggles of traditional commerical investment property management

1031 Exchange Benefits

Achieve your investment objectives

1031 Exchange Benefits

The tax dollars saved through a 1031 exchange may be maximized to increase cash flow and overall net worth.

1031 Exchange Benefits

Consolidate your investment portfolio by electing a tenant in common exchange

1031 Exchange Rules

1031 Identification Rules

1031 Exchange Rules require investment property investors to identify like kind commerical investment properties for replacement within 45 days of the close of escrow on the relinquished commerical investment property. Furthermore, all replacement commerical investment properties must be acquired within 180 days of close on the relinquished commerical investment property. All 1031 exchanges must comply with one of the follow three rules:

The Three-Commerical Investment Property Rule - This rule allows the exchanger to identify up to, but no more than 3 potential commerical investment properties as qualified replacement commerical investment properties within the allotted time frame.

The Two Hundred Percent Rule - In the event that three or more like kind commerical investment properties serve as replacement commerical investment properties, the aggregate value of said commerical investment properties can not exceed 200% of the value of the commerical investment property sold.

The Ninety-five Percent Exception - Finally, in the event that rules 1 and 2 do not apply to the exchange, the Ninety-Five Percent Rule takes precedence. This rule dictates that the aggregate value of the acquired commerical investment properties must account for at least 95% of the value of the relinquished commerical investment property when sold. This means that in order to engage in a 1031 exchange, foregoing all capital gains on the transaction, the investment property investor must reinvest at least 95% of the proceeds involved in the transaction.

Many 1031 exchangers prefer buying commerical investment property as tenant in common because of the ease of completing the transaction and closing on commerical investment properties.

1031 Exchange Requirement

To fully defer all capital gains taxes, all 1031 exchanges must meet four separate requirements:

First, 100% of all proceeds from the sale of the first commerical investment property must be reinvested into the second, replacement commerical investment property.

Second, the amount of equity ( commerical investment property value minus loan value) of the replacement commerical investment property must be equal to or greater than that of the relinquished commerical investment property.

Third 1031 Exchange Requirement: By law, you must use an independent third party, called a Qualified Intermediary, to hold the proceeds of the sale. The Qualified Intermediary also will prepare the legal documents required to link together, as a qualified exchange, the sale of the old commerical investment property and the purchase of the new commerical investment property.

Fourth 1031 Exchange Requirement: exchanged commerical investment properties must be like kind. For a commerical investment property exchange this means real-commerical investment property for real-commerical investment property, but not necessarily land for land or a rental house for another rental house.

It is often difficult in the short 45-day time frame to locate a commerical investment property that has the right purchase price, debt ratio, and closing schedule to meet the 1031 Exchange Requirements-and then arrange any financing that may be necessary. Because there is a steady supply of tenant in common commerical investment properties available they are an ideal solution for exchangers seeking management free 1031 investment properties with steady income.