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1031 Exchange
February 9, 2009
Matt Isleib
The 1031 exchange or “the real estate exchange” or “tax deferred exchange” as it is also known as was created by the I.R.S in the early 90’s. It is a great tool for the real estate investor. In fact one that I believe that is not used enough.
In a 1031 exchange there is a sale and purchase of “like” properties. Using the 1031 exchange can offset and even sometimes avoid capital gains tax. KEEP in mind there are very important and strict guidelines to adhere to. Definitely consult your accountant as well as your attorney when looking to perform the transfer.
The main benefit of doing a 1031 exchange is the potential offset of capital gains but also the ability to sell an investment property and use the proceeds at a later date to purchase a like property.
Some of the highlights are that the properties need to be “like” properties. Selling a single family and purchasing a single family. Not selling a multi family and buying a condo. The transaction has an allotted time frame window where the purchase needs to take place. All proceeds from the sold property must be used in the purchase of the new property. There must be an actual exchange overseen by a Qualified Intermediary.
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2 Comments to '1031 Exchange'
March 5, 2009
I hope you’ll take my comments in the manner they are given, which is as constructive criticism. Some of the statements in your summary are incorrect. 1) Section 1031 was first added to the code in the early 1920’s, not in the 1990’s. Many of the current-day rules & regs came about after 1984. 2) Many people have the misconception that “like-kind” means a house for a house, a condo for a condo. That is incorrect. Virtually all real estate is like-kind to all other real estate. The determining factor is whether the properties have been held (and will be held) as an investment and/or used in a business or trade. I recently wrote a blog on this topic. (http://bit.ly/1a3ogY). 3) It is not a requirement that all proceeds from the sold property be used in the purchase of the new property, but there will be a tax liability if it is not. If you have any questions or you would like help with an exchange, please feel free to get in touch with me. Section 1031 is a national thing, so I can work nationwide and would be happy to help you. Thanks for bringing attention to this valuable technique.
Ken Tharp
Iowa Equity Exchange
800-805-1031
March 9, 2009
Ken, thank you for your post, I always welcome intelligent insight. I was aware that the 1031 was added many, many years ago. I believe the majority of what is in use today was updated in the late 80’s or early 90’s. I did not find it relevant to mention the original date as what was originally written then is nothing like it is today. And while there is a “misconception” of what “like” properties are I wanted to point out that even though the “code” has a specific definition of acceptable exchanges the LoanClassrooms perspective is from a mortgage investor standpoint and more often than not the mortgage investor is requiring the financing be of “like” properties, a one unit for a one unit etc. So I am writing from a lender standpoint and not a tax advisor standpoint. If you have any other insight I would welcome and enjoy hearing from you. Thanks again for the post and if I have any borrowers looking to conduct a 1031 exchange I will certainly mention the Iowa Equity Exchange!
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