1031 EXCHANGE

NEW for 2021 – Back to 1031 Basics  

Fall has officially begun. School is back in session. And Congress is mulling over the direction of 1031.

It’s a perfect time to review some key 1031 refreshers:

1. 1031 Exchanges are under threat of elimination or heavy restriction by Congress and the administration. There will be many unintended negative consequences with any restriction or a repeal. Your voice makes a difference. Send or resend letters. Click here to let Congress know your thoughts.

2. 1031 is not a tax loophole. Section 1031 has been in the tax code for almost a century as a recognized method to defer taxes.

3. 1031 Exchanges allow taxpayers to defer federal capital gains tax, most state taxes, tax on unrecognized gain due to depreciation, depreciation recapture tax and the net investment income tax imposed by the Affordable Health Care Act.

4. Does a 1031 Exchange make sense for you? Do a quick 5 Point Analysis.

5. There are many non-tax reasons to exchange. 1031 Exchanges can be used to diversify or consolidate portfolios, to increase cash flow, reduce operating expenses, increase appreciation potential, obtain less management intensive property, relocate an investment and exchange for a property that can be used in the taxpayer’s business, and even as an estate planning tool.

6. As a general rule, to fully defer the payment of taxes, taxpayers should purchase Replacement Property with a value equal to or greater than the property that is being sold (Relinquished Property) and reinvest all net proceeds into that new property (Replacement Property). If the taxpayer purchases property of lesser value or doesn’t reinvest all proceeds, the difference is considered taxable boot and the exchange becomes a Partial Exchange with a partial tax deferral.

7. 1031 Exchanges follow strict time limits. Once the Relinquished Property (old investment property) is sold, taxpayers have a total of 180 days to acquire Replacement Property (exchange period). In addition, the taxpayer must identify potential Replacement Properties within the first 45 days of that 180 day period.

8. To avoid having a taxable event, taxpayers may not have actual or constructive receipt of the proceeds from their Relinquished Property(s) sale. A 1031 Exchange needs to be set up prior to closing. This means you cannot start an exchange after you’ve already sold your property.

9. Exchanges between related parties are permitted, however, specific rules must be followed.

10. Partnerships and LLCs can utilize 1031 Exchanges.

11. Reverse Exchanges where an Exchanger buys first and sells second may give you the advantage to maximize your tax deferral. These are more expensive and complex than “regular” exchanges but often are useful when the new property needs to be purchased before the sale of the old property.

12. Unless taxpayers are “swapping real estate” without any money being transferred, a Qualified Intermediary (QI), like IPX1031, is required. A QI provides, documentation and secures the taxpayer’s funds during the exchange period.

13. QIs are not regulated by the federal government nor by most state governments. Therefore, it is essential that taxpayers ascertain the competency of and security provided by a potential QI.

14. QIs like IPX1031 cannot give specific advice – only guidance. Always seek advice from your financial planner, tax attorney and CPA relating to your specific tax and investment goals and situation.

15. Start with the right QI. Choose one (like IPX1031) that has extensive experience, attorneys, CPAs and 1031 professionals on staff, provides financial security and insurance, and that has safeguards in place to protect exchange funds.

Please reach out to one of your local IPX1031 experts to discuss the possibility and feasibility of your or your client’s next 1031 Exchange.

Luke Hays
Vice President/Account Executive
IPX1031
Luke.Hays@sis.ipx1031.com
(877) 494-1031 - Work | (629) 203-2725 - Mobile