What is a §1031 Exchange?

"No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment purposes if such property is exchanged solely for property of a like-kind which is to be held for either productive use in trade or business or for investment purposes."

In other words, if a §1031 exchange is properly structured, an investor can use funds that would normally be paid in capital gains taxes to invest in new property. This enables the investor to upgrade his investment strategy periodically by acquiring properties that best suit his needs at any given time.

The "like-kind" definition applies to nearly any type of investment property. An investor may choose to exchange out of a high maintenance apartment complex into vacant land. Or, if relocating his personal residence, the investor may also wish to relocate his investment properties. The possibilities are as endless.

Point to remember:
• Equity not reinvested will be taxable.

Will your transaction qualify as an exchange?

Always discuss the transaction with your tax consultant BEFORE closing on your sale.

Some basic requirements of a properly structured exchange are:

• It must be a trade between two parties (John Smith and the Exchangor are the two parties).

• A Qualified Intermediary must acquire and transfer both the Relinquished and the Replacement Property (done via an Assignment).

• Exchangor and Qualified Intermediary must enter into an Exchange Agreement outlining the duties and requirements of both parties which includes a restriction on the Exchangor's actual or constructive receipt of the sale proceeds (prepared).

• Proper identification of potential acquisition properties and completion of the exchange within the prescribed time deadlines. Briefly stated:

The exchange period begins the day the accommodator transfers the relinquished property to the new owner. The investor then has 45 days within which to identify potential acquisition properties. Thereafter the actual property(s) must be acquired within 180 days of the sale date.

This information is provided only as a guide. For detailed and specific information please refer to your tax consultant.