Unlocking Tax Benefits: A Beginner’s Guide to 1031 Exchanges for Property Investors

Let’s be honest, we all like the idea of a tax break.  If you’re not looking to immediately “cash out”, then a 1031 tax deferred exchange might be for you.  Sellers of commercial property can defer Federal and State capital gains tax on the sale of a property using a 1031 exchange into the purchase of new property.  Real property can be exchanged for “like-kind” property that will be held for the same purpose.  Commercial properties that are held for “productive use in a trade or business” or for “investment” both qualify.

A 1031 exchange can give investors a boost to their purchasing power by using the money that they would have paid in taxes to increase the amount they can contribute to a replacement property.  If the investor wants to defer all tax completely, the property being purchased (upleg) must be equal to or greater in value, equity, and debt than the property being sold (downleg).  Those who are overwhelmed by the management of multiple properties can exchange into a single property.  On the other hand, those who are looking to diversify their portfolio can exchange a single property into multiple properties.

Once the downleg property closes escrow, the investor has 45 days from the date of closing to identify up to 3 properties that they may exchange into, as long as the fair market value of these properties is not greater than 200% of the downleg.  The investor then has 180 days from the date of the downleg closing to close on the purchase of the new upleg property/properties and finish the exchange.  A qualified intermediary (QI) must be involved with the sale of the downleg and also the purchase of the upleg.  The QI will retain the sale proceeds from the downleg until they are applied to the purchase of the upleg.  Keegan & Coppin works with excellent qualified intermediaries who we are happy to connect you with to help answer any questions you may have.