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The following is a guest blog written by fellow attorney Luke Hays. It includes a brief summary of 1031 tax exchanges and explains how they work. This summary should not be used in place of actual legal research. It is only to be used as a quick reference and easy guide for those who are unfamiliar with this exchange and are seeking basic information. For more information, please contact an attorney or use the contact information at the bottom of this post.
Luke Hays is Vice President, Business Development Officer, and Attorney for 1031IPX, a company that specializes in real estate exchanges. Though he’s located in Nashville, Luke’s territory covers Alabama, Tennessee, and Mississippi, and he can handle a 1031 exchange anywhere in the US.
Click here for a brief video summary of 1031 exchanges
What is a 1031 exchange?
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.
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)
The IRS requires the use of an intermediary in virtually every 1031 transaction and the QI must be engaged before the relinquished property is sold.
What is Like-Kind? Can I sell my rental house and buy a 4-plex? Can I sell my vacant lot and buy a rental house?
Yes, you can buy ANY kind of business or investment real estate, anywhere in the US. You can sell the rental house and buy apartments, commercial, industrial, mini storage, bare land, agricultural, etc.
What is required to set up an exchange?
It depends on how the property is owned, but typically we require 1) signed purchase contract, 2) documents related to how the property is owned, and 3) closing officer's contact information. Also, a 1031 exchange must be set up prior to the close of the property being sold.
Do I have to be in contract by the 45 days?
The identification form only requires that you give us the addresses to the properties you are identifying by the 45th day; however, if they are sold to someone else on day 46, you are out of luck. So it is recommended that you are in a firm contract by then. During the 45 days you can change what you’ve identified, but once your identification period is up, you must buy from only that list. No substitutions or changes after day 45.
Do I just need to reinvest my profit?
No. To defer all your taxes, you need to replace the entire net sales price of what you sell, not just the gain. [“Net” refers to the sales price less the closing costs, such as escrow, title, and broker fees. Do NOT subtract the loan balance.]
What next?
If you’re considering setting up a 1031 exchange or just want to discuss your exchange options, call 1031IPX. They charge a flat fee for a 1031 exchange regardless of what the property costs, and all consultations are free. 1031IPX provides a safe and secure way to transfer your funds, financial assurances for your funds, a wealth of expertise in the area, and a solid reputation for facilitating successful transactions.
[INSERT LUKE PHOTO] TO LEFT OF FOLLOWING:
Luke Hays, Esq.
Vice President
luke.hays@ipx1031.com
629.203.2725
M: 629.203.2725
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For handouts to give to your clients, see below.
[INSERT 1031 EXCHANGE BASICS PT 1, 2 & 3 SIDE BY SIDE WITH IMAGES]
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