1031 Exchange by KC Rentfro

What is Internal Revenue Code Section 1031?

Since 1921, Federal tax law under Internal Revenue Code (IRC) section 1031 has permitted a taxpayer to exchange business-use or investment assets for other like-kind business use or investment assets without recognizing taxable gain on the sale of the old assets. The taxes, which otherwise would have been due from the sale, are thus deferred. These can range from relatively simple transactions involving commercial, agricultural and rental real estate to more complex transactions involving aircraft, trucks, trailers, containers, railcars, agricultural equipment, other heavy equipment, livestock and other assets. Most 1031 Exchanges involve separate buyers and sellers and are not simple swaps between two parties. Under these circumstances, tax rules require the use of an independent third party Qualified Intermediary (QI). The QI holds the sale proceeds for the benefit of the taxpayer during the exchange, disbursing funds for purchase of like-kind replacement property, and returning any unused funds to the taxpayer at the end of the exchange. 1031 Exchanges must be completed within 180 days. Taxpayers recognize gain and pay tax on any unused funds or when they ultimately “cash out” of their property.

Like Kind Exchanges, also known as tax deferred exchanges, are defined by Internal Revenue Code (IRC) section 1031. A 1031 Tax Deferred Exchange offers taxpayers one of the last great opportunities to build wealth and save taxes. By completing a 1031 Exchange, the Taxpayer (“Exchanger”) can dispose of investment or business-use assets, acquire replacement property and defer the tax that would ordinarily be due upon the sale.

Since 1921, section 1031 has permitted a taxpayer to exchange business-use or investment assets for other like-kind business use or investment assets without recognizing taxable gain on the sale of the old assets. The taxes which otherwise would have been due from the sale are thus deferred.

A 1031 Exchange allows investors to defer Federal capital gains tax, state ordinary income tax, net investment income tax, and depreciation recapture on the sale of Investment property if certain criteria are met including:

• Buy replacement property for equal or greater than sold for and reinvest all proceeds
• Identify replacement property within 45 days of close of sale
• Purchase replacement property within 180 days of close of sale
• Must Sell and Buy property that is considered “like-kind” to each other
• Process must be handled by a Qualified Intermediary (QI)

There are many reasons to exchange, such as:

• Defer Taxes: Federal, State & Depreciation Recapture
• Diversify or Consolidate a Real Estate Portfolio
• Increase Cash Flow
• Switch Property Types (Land, Industrial, Multi-Family, Office, Retail, Residential, Easements)
• Get Into Other Real Estate Markets (Exchange anywhere within the U.S. & Territories)
• Build & Preserve Wealth
• Set up Heirs for the Future (Estate Planning: Stepped Up Basis)
• Increase Purchasing Power

Tax rules for non-simultaneous exchanges require the use of an independent third party Qualified Intermediary (QI).  Prior to the transfer of the old investment property, the services of a QI are retained to prepare the necessary documentation, securely hold your exchange funds and acquire your new investment property. The QI holds the sale proceeds for the benefit of the taxpayer during the exchange, disbursing funds for purchase of like-kind replacement property, and returning any unused funds to the taxpayer at the end of the exchange. Choosing a Qualified Intermediary (QI) to handle your exchange is a critical part of your 1031 Exchange. Not all QIs are the same. IPX1031 is the best choice for your 1031. Here’s why:

• Owned by Fidelity National Financial (NYSE: FNF)
• Nationwide locations
• $100M Fidelity Bond
• $30M E&O Insurance
• $50M Written Performance Guaranty
• Segregated Bank Accounts
• Knowledgeable Staff
• Attorneys & Certified Exchange Specialists®
• Full Service Qualified Intermediary
• Superior Customer Service