1031 Exchanges

Guide to 1031 Exchanges

Done properly, 1031 tax deferred exchanges of property can postpone a tax bill
By Kay Bell

As with all investments, you'll eventually owe taxes on any profit you make from real estate. A 1031 tax exchange, however, gives you tax-payment flexibility. By employing a 1031 exchange, you postpone your tax bill until a future date when you're better equipped to meet your tax liability.

Named after the IRS Code Section 1031, which authorizes this tax move, a 1031 exchange allows a real estate investor to defer any due taxes. Although it's commonly called a 1031 tax deferred exchange, you don't actually swap properties. Rather, you sell your investment real estate and then quickly reinvest the proceeds into a similar, or like-kind, property.

When considering 1031 tax exchanges:

1. Examine your property swap options for 1031 tax exchanges.
2. Explore the various ways you can complete a 1031 exchange.
3. Familiarize yourself with the role that 1031 exchange companies play in the process.

Action Steps

The best contacts and resources to help you get it done

Explore the types of properties to swap for 1031 exchanges You cannot exchange a property you own for personal purposes, such as your home. The two pieces of swapped real estate in a 1031 tax deferred exchange do not have to be identical; they simply have to both be properties held for investment or used in a trade or business.

I recommend:  Check IRS Publication 544 (Sales and Other Dispositions of Assets) for the official word on 1031 exchanges and download Form 8824, which must be filed in connection with 1031 tax deferred exchanges. Use the online search option at 1031 Help Center to examine property listings that might meet your 1031 tax exchange needs.

Examine the many ways to achieve 1031 tax deferred exchanges While two pieces of real estate can be swapped property for property, this simultaneous method is not the only way to accomplish a 1031 tax exchange.

I recommend:  Bayview Financial Exchange Services offers a variety of resources to help you understand the various exchange options, from simultaneous swaps to 1031 reverse exchanges.

Understand the role of 1031 exchange companies Federal law prohibits an investor from receiving or having access to funds generated from the first leg of the 1031 exchange, i.e., the sale of the initial investment property. Rather, you must use a Qualified Intermediary, typically provided by 1031 exchange companies, to safeguard the funds produced by the sale of the first property.

I recommend:  The Federation of Exchange Accommodators is the official national trade association for professionals who conduct 1031 tax deferred exchanges. Although the site does not offer a referral service, you can check for the FEA seal on sites such as Accommodator Finance Company, Bayview Financial Exchange Services and Exchange Authority. But don't necessarily rule out other 1031 exchange companies, such as 1031 Exchange Options and 1031 Equity Advisors, simply because there's no logo on their websites.

Learn the language of 1031 exchanges It's a good idea to learn the basic lingo for 1031 tax deferred exchanges, which are also referred to as Starker exchanges. Knowing the terminology can help keep you from making a costly exchange mistake.

I recommend:  For 1031-specific terms, check out the glossaries at 1031 Exchange Guide, 1031x.com and 1031-Exchange.com.

Compute your capital gains savings with 1031 tax exchanges Your accountant, financial adviser or exchange intermediary can help you figure out exactly how much in tax savings you'll gain via a 1031 tax deferred exchange. But online calculators are a great way to get an approximation of the capital gain taxes you will defer via a 1031 exchange.

I recommend:  A couple of good online calculators are available at 1031 Exchange Options and Spectrus Real Estate Group.

Tips & Tactics

Helpful advice for making the most of this Guide

• Thorough knowledge of Tax Code Section 1031, tax deferred exchanges and all the associated legal requirements is critical, so carefully vet 1031 exchange companies.
• 1031 exchange options include simultaneous swaps and 1031 reverse exchanges.
• The real estate in a 1031 exchange must be held for business/investment purposes.