A §l031 Exchange is a transaction in which a taxpayer is allowed to sell one property and buy another without a tax consequence. This can be done through a Simultaneous or Delayed §1031 Exchange. The transaction is authorized by §1031 of the IRS Code. It is the best strategy for the deferral of capital gains tax that would ordinarily arise from the sale of real estate.
A successful exchange results in the taxpayer being able to utilize 100% of the proceeds from the sale of property to purchase a new property.
Real Estate owners can accomplish virtually any investment objective with §1031 Exchanges including greater leverage, diversification, improved cash flow, geographic relocation, and/or property consolidation.
It is often difficult in the short 45 day time frame to locate a property that is the right size, can be closed in a timely manner, and arrange for any financing that may be required. A Tenant In Common ownership interest has a number of advantages, such as:
Flexible size to match your needs
Pre-arranged financing
Less management hassles
Economies of scale
Can be identified & closed in a timely manner
Investment can often be diversified into more than one property.
You currently own management-intensive real estate. Although you are comfortable with real estate investments and have had good returns on real estate in the past, you do not like the daily headache that can accompany real estate management. You are ready to give up the hassles of dealing with tenants, maintaining facilities, paying property taxes, etc. You would like to sell your property but are faced with onerous tax consequences on the sale. You’d rather enjoy the income from the property and let someone else manage it. With a §1031 Exchange, you can do exactly that.
A TIC §1031 Exchange allows you to exchange your management-intensive property for a quality property with the potential to generate steady income, tax benefits and appreciation potential. With a TIC §1031 Exchange, you no longer have to feel burdened by your real estate. Through your management contract, a manager will be retained to manage the asset while you enjoy all the benefits of income property ownership - with none of the headaches. Your income from the replacement property may be higher than what was being received from the original property. You can earn substantial cash flow that may be up to 60% sheltered by depreciation of your new basis in your TIC purchase.
No capital gains taxes may be due until the replacement property is eventually sold. If you pass away while owning a property, your heirs will receive a stepped up basis and the capital gains tax will be completely avoided.
A §1031 Exchange is usually a three-way exchange in which an intermediary
is used to facilitate the transaction. There are four basic steps:
Seller arranges for sale of property and includes exchange language in contract
At closing, sales proceeds go to an Intermediary for a §1031 Exchange.
Seller identifies potential Exchange properties within 45 days of the closing.
Seller completes Exchange within 180 days of closing.
In a §1031 transaction, these steps can occur simultaneously. Commonly,
a delayed or “Starker” exchange is needed; steps three and four
can be delayed up to 45 and 180 days respectively if certain conditions are
met. Preferably, before you sell your property you need to consider what type
of replacement property will work best for you, and whether or not you want
to own a whole property or a Tenant In Common interest in a property.