Tax-Deferred 1031 Exchange

The sale of a business or investment asset, whether it is real estate or capital equipment, can create a large tax liability. A properly structured tax deferred exchange under Internal Revenue Code §1031, however, allows businesses and individuals to defer the recognition of the capital gains or other taxes associated with the sale of most business or investment assets, as long as the existing assets are exchanged for other “like kind” assets In general, most tax-deferred exchanges are structured either as a real property or a personal property exchange. Real property exchanges include only interests in real property, while personal property exchanges encompass virtually all other types of property.

ACA’s wholly-owned affiliate, specializes in assisting investors with executing Tax Deferred 1031 Exchange strategies, by identifying and structuring acquistions for eligible real property. By utilizing an exchange clients are able to maximize their capital by deferring the taxes that would otherwise be incurred on an outright sale of their property. Deferrals can be continued through as many exchanges as the investor wishes, with the tax liability passing into that investor’s estate in the event of their death.

Properly structured and administered, an exchange becomes an invaluable tax saving and wealth building tool.

Section 1031 Requirements

1031 TIC properties must be considered “like kind” (similar in character or nature, notwithstanding differences in quality or grade) in order to qualify for tax deferral. To qualify as like-kind, the investor must hold them for productive use in a business or for the purpose of investment. Types of eligible properties may include:

  • Raw Land
  • Multifamily (Apartments)
  • Single-Family Rentals
  • Retail Shopping Centers
  • Office Buildings
  • Industrial Facilities
  • Storage facilities
  • Non-Resident Single Family Residence

To defer the entire taxable gain the following IRS guidelines must be followed:

  • The replacement property must be of equal or greater value than the relinquished property.
  • All the equity in the relinquished property must be used to acquire the replacement property. Retaining any gain, or equity would create “cash boot” and would be taxable.

The IRS has strict identification and timeline rules that must be followed when an investor elects to utilize IRS Code 1031. The investor shall identify in writing within 45 days which exchange properties may be acquired following one of these three rules:

  • Three-Property Rule: Identification of up to three properties regardless of the total value of property identified.
  • 200% Rule: Identification of any number of properties wherein the combined FMV (fair market value) does not exceed 200% of the relinquished properties’ FMV.
  • 95% Rule: Identification of any number of properties regardless of the aggregate FMV, as long as at least 95% of the property is ultimately acquired.

The investor must also close on the replacement property or properties within 180 days of the closure for the relinquished property.

It is required for the position of Qualified Intermediary (QI) to be filled by an uninvolved third party. The QI holds the proceeds from the relinquished property until they are reinvested in the exchange property. An “exchange agreement” must exist in writing between the QI and the investor, in order to prevent the investor from facing “constructive receipt” of the funds during the exchange period. The QI is required to complete a valid 1031 exchange and ensures that all roles are followed and equity is preserved during the process.

Section 1031 Exchange Services

For more information or for assistance with a Tax Deferred 1031 Exchange transaction, including a list of properties currently available in Austin, please contact us and we will contact you within 24 hours.

Disclaimer: A professional tax advisor should be utilized to ensure that all of the requirements of Section 1031 are met. Failure to do this can result in the cancellation of the capital gains deferral and result in immediate tax liabilities and associated penalties.