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1031 Investment Property

A 1031 delayed exchange ("Starker") is not a swap and it is highly unlikely that one will ever swap real estate straight across the board. Lifestyles, the industry and timing rarely permit this type of maneuver. But, take heart, you may take full advantage of the law which allows you to keep all your real estate sales profits and avoid 100% of its taxation by simply reinvesting in real estate within 180 days. It's that easy.

The Internal Revenue Code Section 1031 tax deferred (sometimes called tax-free) exchange is Congressional permission to sell income or investment real estate and buy another of like kind and equity in order to defer indefinitely (and perhaps eventually eliminate) all state and federal taxes on your capital gain.

The advantage of this tax postponement is obvious. The investor can reinvest his or her full capital into new properties, without any reduction due to tax payments. The government, in effect, extends an interest-free loan to the investor, who thus is able to obtain leverage over and above that obtained from regular mortgage financing.

The ground rules are simple and structuring your sale as an exchange can be easy, fast and inexpensive. In fact, a good third party intermediary (facilitator or accommodator as they are often called) and a qualified real estate broker will guide you through the entire process so long as you inform them BEFORE close of escrow that you intend to "exchange". A good intermediary will insure that you follow the few strict rules of the Internal Revenue Code:

1. One party must agree to cooperate and sign a novation which outlines the intention to "exchange" rather than sell, at no expense or liability to the other party.
2. You must identify in writing, usually to your intermediary, a list of your replacement property(ies) on or before 45 days after close of escrow. In addition, the IRS has limited the number to three and, if you wish to identify more than three then their total values may not exceed 200% of the total value of the relinquished property(ies).
3. You must take title to your replacement property within 180 days of the close of escrow on the sale/exchange.

Any property held for productive use in a trade, business, or investment can be exchanged for like-kind property. Like-kind refers to the nature of the investment. For example: a single family rental can be exchanged for a triplex. Raw land can be exchanged for an office building. ANY combination of real estate investments will work.

As always, you should consult your attorney or professional tax preparer for additional information regarding your particular transaction.

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