A tax haven for preserving real estate wealth.

The 1031 tax deferred treatment of capital gains is one of the best real estate investor vehicles for preserving and building real estate wealth.

Six important factors in 1031 exchanges.

1.  Both your former property (relinquished property) and your new property or (replacement property) must qualify as a 1031 property.

2. You have 45 days to prepare a list of properties to buy.

3. You have 180 days to close on the purchase of one or more of the properties on your 45-day list.

4. You may not touch the money.  Typically, a QI or (Qualified Intermediary) holds the money.

5. The holder of title to both the relinquished property and the replacement property must be the same.

6.  In general, you must equalize the debt on the relinquished property and your replacement property.

What qualifies for a 1031 exchange?

It must be property that is held for investment, or used in a trade or business.

Are there time requirements?

In order to defer the tax on your 1031 exchange you must meet two time line requirements.

Within 45 days of closing of the relinquished property, you must prepare a form identifying the property you want to acquire.  To be safe, you want to identify more than one property, but not more than three.  This document is given to your Qualified Intermediary.  Failure to do so will disallow your exchange.

Within 180 days of the closing of your relinquished property you must purchase and close on one or more of the properties listed on your 45-day form.  Failure to close on one of these properties before the 180 day period will disallow your exchange.

Who is a Qualified Intermediary?

 A Qualified Intermediary, (QI) is required by the IRS during the exchange process.  They hold your money during the 1031 Exchange.

 Most Title Companies offer this service.  They hold and disburse the money during the exchange process.  Verify with the Title Company the funds will be placed in an interest bearing account. A million dollars resting in a 3% interest bearing account for 180 days can accumulate to $15,000; this is well worth asking the question.

 Your attorney, accountant, real estate agent or broker, etc. may not be the QI.  The QI must remain an independent third party.

 What title/ownership issues should be considered?

 In general, the title to the replacement property has to be the same as the title to your relinquished property.  ABC Corporation sells relinquished property; ABC needs to acquire the replacement property.

 What about debt?

 Generally, the debt on the replacement property must equal or exceed the debt on the relinquished property.  There are exceptions, receiving cash or (boot) in the real estate exchange does not defeat the 1031 exchange.  You will pay a taxable gain on the money you receive in the transaction.

 These are the basics in a 1031 exchange, however, there are many other avenues and angles to approach an exchange I have not addressed.  The tax advantages to conducting a 1031 exchange on your investment property are well worth your time to consider.  Rather than facing a large tax bill, consider the deferred exchange and utilize the saved tax dollars to produce income and additional wealth for you and your legacy.

If you have any questions, or are considering selling your investment property, contact me to evaluate your options and preserve your wealth.

Dave Hasvold is a Broker Associate with Legacy Real Estate. He grew up in Sioux Falls and graduated from SDSU with a BS in Commercial Economics. After graduating from college Dave moved to Kansas City, there he owned and managed a Best Western motel for twelve years. Dave sold his motel and purchased a retail strip mall in Sioux Falls, which he owns and manages today. He has over twenty years of commercial real estate and business ownership experience. Dave specializes in all aspects of commercial real estate; sales, leasing and investments. He enjoys helping his clients make informed decisions for a smooth transition into their new business venture. Dave enjoys jet skiing, snow skiing, motorcycle riding, golf and family time. Dave is a member of the Sioux Falls Chamber of Commerce and Sioux Valley Cycle Club. Contact Dave at 605.336.7376 or email him.

Share on Facebook