1031 Exchange

Property owners considering “selling” their investment property may want to consider “trading” it in a 1031 exchange.

What Is It? In a 1031 exchange, a property owner “trades” a relinquished property for a “like-kind” replacement property while deferring the payment of federal income tax and some state tax on the transaction.

A 1031 exchange is tax-deferred - not tax-free. When a replacement property is ultimately sold (not as part of another exchange), the original deferred gain plus any additional gain realized since the purchase of a replacement property is subject to tax.

Like-Kind Property All real property is considered “like-kind” with other real property of the same nature and quality. Both a relinquished and a replacement property in a 1031 exchange must be held for investment purposes or for productive use in a business. A primary residence, second home or vacation home does not qualify for a 1031 exchange.

Some examples of qualified like-kind real property include:

- rental property
- office suite
- retail space
- vacant land

Benefits Some of the benefits of a 1031 exchange include:

- Postpone or potentially eliminate tax due on any gain in the sale of qualifying investment property.
- Acquire and dispose of property to reallocate your investment portfolio without paying tax on any gain.
- More money available to invest in another investment property. In effect, you receive an interest-free loan from the federal government in the amount you would have paid in tax on any gain.

Qualified Intermediary A Qualified Intermediary (QI) - an independent party who facilitates the exchange - is required to transact a 1031 exchange. The exchange ends the moment the taxpayer has actual or constructive receipt of sale proceeds of a relinquished property. The QI holds all sale proceeds until funds are needed to acquire a replacement property. The QI then delivers the funds directly to the closing agent.