A 1031 exchange (also referred to as tax-deferred or like-kind exchange) enables real estate investors to defer paying capital gains taxes on the sale of a property by reinvesting the proceeds into a new property of equal or greater value. The concept of a like-kind exchange originates from the United States Internal Revenue Code Section 1031.

A 1031 exchange allows real estate investors to sell a property and reinvest the proceeds into a new property without incurring immediate tax liability. This allows investors to defer capital gains taxes and potentially increase their cash flow, while also providing greater flexibility and more investment options. By completing a 1031 exchange, investors can keep 100% of their net proceeds available to reinvest in other like-kind (investment) replacement properties and reallocate, consolidate, or diversify their investment portfolio.

Key rules to consider:

1. The properties involved in the exchange must be held for investment purposes.
2. The properties being exchanged must be “investment properties”, which means they are held for investment or business purposes. This requirement is often described as the properties being “like-kind”, but it’s important to understand that the focus is on the investment nature of the properties, rather than their physical characteristics.
3. All of the sales proceeds from the relinquished property (downleg) must be used to acquire the replacement property (upleg) or properties to fully defer taxes. Any amount that is not reinvested in a like-kind property, known as “boot”, will be taxable.
4. The replacement property must be identified within 45 days of the sale of the relinquished property, and the acquisition must be completed within 180 days.
5. A qualified intermediary must be used to facilitate the exchange and hold the funds from the sale of the relinquished property until they are used to acquire the replacement property.

It’s important to note that there are other more complex rules that may apply, so it’s recommended that investors work with a qualified tax professional or attorney to ensure compliance with all regulations.

The investor must identify potential replacement properties within 45 calendar days of the sale of the original property (identification period) and must close on the replacement property or properties within 180 calendar days of the sale of the original property (exchange period), or by the due date of their tax return for the year in which the original property was sold, whichever is earlier.

A qualified intermediary (QI; also referred to as an exchange faciliator or accommodator) is a neutral third party that facilitates the 1031 exchange transaction by holding the proceeds from the sale of the relinquished property and using them to acquire the replacement property. The QI plays a critical role in ensuring that the exchange is properly structured and executed in compliance with IRS regulations. It’s important to choose a reputable and experienced QI who is familiar with the rules and requirements of 1031 exchanges, and who has a track record of successfully completing exchanges for their clients.

No, you cannot complete a 1031 exchange into a Real Estate Investment Trust (REIT) as a like-kind replacement property. The IRS has specific rules about what types of properties qualify as like-kind, and a REIT is considered a different type of investment than a direct interest in real property.

Individuals, C-Corporations, S-Corporations, General Partnerships, Limited Partnerships, Limited Liability Companies, Trusts, and any other taxpaying entity, who own qualifying property, may perform a 1031 Exchange to defer capital gains and depreciation recovery taxes.