When should you use a 1031 Exchange?
There are two main questions to ask yourself:
1) Will I incur capital gains tax when I sell my investment property?
2) Do I want to purchase a replacement property?
You may also want to utilize a 1031 exchange to carry out a mix of business strategies. A retail owner might use an exchange to trade an old building for a newer, trendier shopping center. In a more complex deal, an exchange can be part of an exit strategy for a partnership.
Utilize a 1031 Exchange to defer payment of tax upon selling business or investment real estate. The seller “directs” the proceeds of their investment into a replacement property by having a Qualified Intermediary facilitate the 1031 exchange process. They are able to avoid recognition of taxes because the seller did not “cash-out.”
Any property held for productive use in a trade or business or for investment applies as a like-kind property. Like-kind refers to the nature of the investment rather than the form. You can choose any type of investment property as a replacement property.
In the past, there were no time constraints on the exchange.
When you exchange, provide an “unambiguous description” of the potential replacement property on or before the 45th day after closing on the relinquished property. If you wish to identify or purchase multiple properties, you must follow one of the following guidelines:
- Up to three properties of any value with the intent of purchasing at least one.
- Three properties with an aggregate value exceeding 200% of the relinquished property (95% of the market value of all properties identified need to be acquired).
- Identify more than three properties with an aggregate value that does not exceed 200% of the market value of the relinquished property.