§1031 TAX DEFERRED EXCHANGE

What is it?

A properly structured §1031 Tax Deferred Exchange allows an investor to sell a property, reinvest the proceeds into a new property and defer all capital gain taxes. As long as the type of property being exchanged is like-kind, this can be done with any investment real estate – for example, vacant land can be exchanged for rental property. In addition, it is often possible to exchange one property into multiple properties. The three property rule allows for an exchange into three separate properties which can provide for diversification of capital. In most cases, one’s personal residence is not a like-kind investment property. Some types of properties considered like-kind properties are commercial buildings, rental income properties, land, multi-family properties, grocery anchors and retail centers.

Exchanging Up

To accomplish a fully tax-deferred exchange the rule of thumb is… exchange even or up in value and exchange even or up in equity and in debt.

Boot

To the extent that one does not exchange even or up in equity and debt, one will have received non-qualifying property (“boot”) in your exchange. If boot is received, tax is computed on the amount of gain on the sale or the amount of boot received – whichever is lower.

Typical Exchange Addendum Language for Sales Contracts

“Buyer hereby acknowledges that it is the intent of the Seller to effect an IRC §1031 tax deferred exchange which will not delay the closing or cause additional expenses to the Buyer. The Seller’s rights under this agreement may be assigned to a Qualified Intermediary, named by Seller, for the purpose of completing such an exchange. Buyer agrees to cooperate with the Seller and the Qualified Intermediary in a manner necessary to complete the Exchange.”