Avoid Capital Gains Taxes with 1031 Tax-Deferred Exchanges

RIO Commercial specializes in the buying and selling of commercial and residential real estate properties valued up to or ranging from $25 million in the high demand Westside communities that surround Los Angeles: Brentwood, Malibu, Marina del Rey, Pacific Palisades, Venice, West Los Angeles and Westwood. Because of the high demand for these properties and our thorough knowledge of the aforementioned communities, it is our job to also understand and advise you on Federal and California real estate tax law in order to create affordable real estate solutions for buyers and sellers. One such solution to maximizing cash flow and minimizing tax liability is to leverage the 1031 Tax-Deferred Exchange.

An IRS Section 1031 Tax-deferred Exchange allows real estate investors to exchange one like-kind real estate property for another. The financial benefit to a 1031 exchange is that you avoid paying capital gains taxes by deferring the taxes you owe on the sale of the fist property as long as you buy the second property within a specific time period.

Speak with a 1031 Like-Kind Property Exchange Expert
Call 310-403-4167 or E-mail ann@rio-commercial.net.

What is a 1031 Exchange?

Internal Revenue Service Code section 1031 allows a real property owner to sell property and then reinvest the proceeds in ownership of like-kind property and defer the capital gains taxes.

As referenced IRS code section 1031 (a), "like-kind" means similar in nature or character notwithstanding differences in grade or quality. In regard to real estate, one kind of class of property may not, under that section, be exchanged for property of a different kind or class.

1031 Exchange Terms

Examples of Like-Kind Properties under Section 1031

Examples of like-kind properties are: apartments, commercial buildings, condominiums, duplexes, raw land and rental homes. Examples of non like-kind properties include: a primary residence, stocks and bonds, notes, partnership interests, and property to be resold immediately after initial purchase or completion of improvements.

To qualify as a like-kind exchange, property exchanges must be performed in accordance with the rules set forth in the tax code and in the Treasury regulations.

There are five (5) tax classes of property:

Property used in taxpayer's trade or business.
Property held primarily for sale to customers.
Property which is used as your principal residence.
Property held for investment.
Property used as a vacation home.

Section 1031 applies to the first and fourth property tax classes mentioned above and potentially the fifth class. Business use is defined as follows: "To hold property for productive use in trade or business."

Property retired from previous productive use in business can be considered a qualifying property.

The Role of a Qualified Intermediary in a 1031 Exchange

The proceeds from the sale must go through the hands of a qualified 1031 exchange intermediary. A qualified intermediary, or QI, is typically an entity legally empowered to hold funds facilitating a 1031 exchange. The qualified intermediary must not be a relative or agent of the exchanging party. As an exception, a real estate agent may serve as a qualified intermediary if the current transaction is the only instance in which the agent has represented the exchanging party over the past two years.

Avoiding Capital Gains Taxes

Monetary proceeds from the original sale reinvested in the replacement property may be sheltered from taxes. Monies retained will become taxable income.

More 1031 Exchange Requirements

Replacement property must be subject to an equal or greater level of debt than the sold property. Within 45 days of selling the relinquished property a suitable replacement property must be identified. This 45 day rule is very strict and cannot be extended should the 45th day fall on a Saturday, Sunday, or legal holiday.

The replacement property must be received by the taxpayer within the "exchange period" ending no more than 180 days after the sale date of the relinquished property, or the tax return due date for the taxable year in which the transfer of the relinquished property occurs. This 180-day rule is very strict and cannot be extended should the 45th day fall on a Saturday, Sunday, or legal holiday.

Most 1031 exchanges use a 3-property rule. A taxpayer may select any three properties as possible replacements for the sold property.

A taxpayer may also select any number of properties as possible replacements for the sold property as long as the aggregate value of those properties does not exceed 200% of the value of the sold property.

A taxpayer may identify any number of properties as possible replacements for the sold property as long as at least 95% of the aggregate value is purchased.

In a 1031 exchange any real property for any other real property can be exchanged within the United States or its possessions if said properties are held for productive use in trade or business or for investment purposes.