Articles / Tax Deferral & Mitigation Strategies / 1031 Exchange

Taxes are what we refer to as ''guaranteed losses'' and we attempt to defer or eliminate them wherever it is possible. This section covers the primary ways in which an investor can legally defer or mitigate their taxes on income and capital gains.

Illustrated 1031 Exchange Guide

We are proud to announce the launch of our new illustrated 1031 exchange guide! In this article we will walk you through each section of our new 1031 guide step by step. 

The 1031 exchange allows an investor to defer the capital gains taxes that would otherwise be due on the sale of investment property.

In a traditional sale, taxes may exceed 20--30% of capital gains (use our capital gains tax calculator to estimate yours). However if the proceeds from the sale are reinvested according to the rules laid out in IRC §1031, those taxes can be avoided.

To defer the recognition of capital gain, an investor must follow three basic 1031 exchange rules. First, the replacement property must be like-kind to the relinquished property. Generally, real estate held for business or investment purposes in the United States is considered "like kind,” including commercial and residential property.

While residential property held for business or investment purposes qualifies for a like-kind exchange, one’s own residence or vacation home does not. (However there are other tax shelters available for the sale of a personal residence or vacation home.)

Second, the total value of the replacement property must be equal to or greater than the total value of the relinquished property to fully avoid capital gains taxes. Any capital that is not reinvested is taxable “boot.”

Lastly, the ownership title for the replacement property must be identical to the title for the relinquished property.

Below is an overview of the steps necessary to complete a 1031 exchange. If you will be selling investment real estate and are interested in avoiding capital gains taxes, you should consider a 1031 exchange.

Once you decide to complete a 1031, is important to contact a Qualified Intermediary prior to closing escrow on your current investment property. The Qualified Intermediary will hold the proceeds from the sale during the exchange period. If you were to receive any money, such as a wire from escrow to your personal bank account, or even an uncashed check for any of the proceeds, this capital would become irreversibly taxable.

Once the Qualified Intermediary receives the proceeds from the sale of your investment property, you can work with a broker or investment advisor to identify suitable replacement properties.

If you would like to speak to a knowledgeable
1031 investment advisor who has access to available on- and off-market 1031
investment property, fill out the form at the top of this page.

After you have decided which of the potential replacement properties to acquire, your Qualified Intermediary will forward the funds for closing.

There are strict time limits for the identification and acquisition of the replacement property. Potential replacement property must be identified by midnight on day #45 after the close of escrow on the relinquished property, and the replacement property must be acquired by midnight of day #180. The day after the close of escrow on the relinquished property is day #1. The exchange period includes weekends and holidays, and there are no exceptions.

You can calculate your 45th and 180th day deadlines
using our 
1031 time limit calculator.

You have your choice between three different rules for identifying and acquiring 1031 replacement properties. You only need to comply with one of these rules. You may identify up to three replacement properties and purchase any, or all, of them, regardless of their total value, to complete your exchange (the “3-Property Rule”).

Or, if you’d rather, you may identify more than three replacement properties, if their total value does not exceed 200% of the total value of the relinquished property. You may purchase as many of the identified properties as you want (the “200% Rule”).

Finally, if neither of the other two rules suit your needs, you may identify any number of replacement properties, regardless of their total value, as long as you acquire 95% of the total value of all of the properties identified (the “95% Rule”).

You can continue to defer the recognition of your capital gains using the 1031 exchange until you are ready to pass your investment property on to your heirs. When your beneficiaries inherit your property, its tax basis steps up to the current market value. 

View the entire 1031 exchange infographic in one piece here, and use the buttons provided to share it on Facebook, Twitter, Google+, LinkedIn, or Pinterest. If you would like to embed this infographic on your own website, there is an embed code provided, which you can simply copy and paste into your own webpage.

Written By: Louis Swingrover

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