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1031 Exchange Basics

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What is an IRC 1031 Exchange?

Whenever you sell business or investment property and you have a gain, you generally have to pay tax on the gain at the time of sale. IRC Section 1031 provides an exception and allows you to postpone paying tax on the gain if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange. Gain deferred in a like-kind exchange under IRC Section 1031 is tax-deferred, but it is not tax-free.

How Long Do I have to Identify?

The exchanger has 45 days from the close of escrow to identify replacement property.

How long do I have to purchase the replacement property?

The exchanger has 180 days to close escrow on the replacement properties.

What is Like Kind-Property?

In a 1031 Exchange, the replacement property, must be like-kind in relation to the relinquished property. In general, any real estate that's held for business or investment purposes in the US or US Virgin Islands in considered "like kind".

Do all Proceeds have to be reinvested?

The replacement property must be of equal or greater than the value of the property being relinquished, in order to obtain full deferral.

Do the titles have to be identical?

The ownership title for both the relinquished property and the replacement property must be identical.

Rules of Property Identification

3-Property Rule

The exchanger may identify up to three potential replacement properties and can purchase any or all of them, in spite of their total value, to complete their exchange.

200% Rule

The exchanger may identify more than three potential replacement properties as long as the total value does not exceed 200% of the value of the relinquished property.

95% Rule

The exchanger can identify any number of replacement properties regardless of the total value as long as the exchanger purchases 95% of the total value of all the identified properties.

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1031 Risk Disclosure:

  • There is no guarantee that any strategy will be successful or achieve investment objectives;

  • Potential for property value loss – All real estate investments have the potential to lose value during the life of the investments;

  • Change of tax status – The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities;

  • Potential for foreclosure – All financed real estate investments have potential for foreclosure;

  • Illiquidity – Because 1031 exchanges are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments.

  • Reduction or Elimination of Monthly Cash Flow Distributions – Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions;

  • Impact of fees/expenses – Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits

Not an offer to buy, nor a solicitation to sell securities. All investing involves risk. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

 

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