1031 Exchange: Tax-Deferred Trade for Real Estate Investors

By Fabi R. Gomes | June 3rd, 2019

A 1031 exchange gets its name from Section 1031 of the U.S. Internal Revenue Code, which allows an investor to prevent paying capital gains taxes when selling a property and to re-invest the proceeds from the sale, within certain time limits, in one or more properties of equal or greater value.

Under Section 1031, earnings received from the sale of a property remain taxable. For that reason, proceeds from the sale must be transferred to a qualified intermediary (a person or company with no formal relationship with the parties involved that agrees to facilitate the 1031 exchange by holding the funds) who then transfers the funds to the seller of the replacement property or properties. In effect, you can change the form of your investment without recognizing a capital gain, thus allowing your investment to continue to grow tax-deferred. There is no limit on how many times or how frequently you can do a 1031 exchange. If you own a business and are thinking of investing in another, you might also want to consider a 1031 exchange. However, the provision is only for investment and business property, so exchanging a primary residence for another home is not eligible for these benefits.

A 1031 exchange has two crucial, non-negotiable, and non-extendable deadlines: Within 45 days of the sale of your property, you must nominate a replacement property in writing to the intermediary, identifying the property you wish to acquire. The second timing rule pertains to closing: you must close on the new property within 180 days of the sale of the old.

Expenses and fees impact the value of the transaction and therefore the potential boot—the difference in value between a property and the one being exchanged—as well. Some expenses that can be paid with exchange funds include broker’s commission, qualified intermediary fees, filing fees, related attorney’s fees, title insurance premiums, related tax adviser fees, finder fees, and escrow fees. Expenses that cannot be paid with exchange funds include financing fees, property taxes, repair or maintenance costs, and insurance premiums.

Understanding the 1031 exchange process is critical for your investment. Always consult a professional before making any major decisions with your investment properties. Our CBHarper agents have relationships with any third-party experts you may need during your transaction, from contractors to financial advisors. Contact us now if you have any questions regarding the 1031 exchange process.

Coldwell Banker D’Ann Harper, REALTORS®  can be reached at (210) 483-7581 or pr@cbharper.com and has been an affiliate of the Coldwell Banker franchise system for over 30 years. 

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