How to Understand 1031 Exchanges

What if you could channel every dollar of profit into your next real estate deal instead of handing it over to taxes? A 1031 Exchange, under Section 1031 of the Internal Revenue Code, lets investors defer capital gains by exchanging one qualifying property for another. In a traditional exchange, you sell your property, identify up to three replacements within 45 days, and close on one of them within 180 days. A reverse exchange uses a Qualified Intermediary to acquire the replacement first, completing the swap within 180 days of selling the original asset. An improvement exchange allows you to hold proceeds while renovating a replacement property under the same 180‑day rule. Even vacation homes can qualify if they meet IRS rental‑use tests and you keep thorough records. To comply, both properties must be like‑kind, match or exceed value and debt, list the same taxpayer, and follow strict deadlines. While many Family Offices recognize the power of 1031 Exchanges, our multi‑year Family Office Real Estate Investment Study shows fewer than one in three complete an exchange annually. This underutilization leaves millions in tax savings and reinvestment capital on the table. Leading offices embed quarterly or annual 1031 reviews into governance calendars, engage intermediaries and tax counsel at deal inception, and train teams on exchange criteria. Individual investors can adopt these best practices by partnering early with a reputable intermediary, integrating exchange checklists into transaction workflows, keeping accurate documentation, and consulting professional advisors for complex exchanges. By making 1031 Exchanges part of regular portfolio reviews, you preserve more equity, accelerate portfolio growth, and safeguard wealth for future generations.

A 1031 exchange is a powerful tax-deferral strategy used by real estate investors to avoid paying capital gains taxes when selling a property. This process, named after Section 1031 of the IRS tax code, allows an investor to sell an investment property and reinvest the proceeds into a similar or "like-kind" property, deferring the capital gains tax. Key points about a 1031 exchange: 1. Deferral of Capital Gains Tax: When you sell an investment property, you're typically required to pay capital gains tax on the profit. A 1031 exchange allows you to defer this tax if you reinvest the proceeds into another property of equal or higher value. 2. Like-Kind Property: The new property must be similar in nature and function to the one being sold. For example, a rental property can be exchanged for another rental property, but not for a vacation home. 3. Strict Timelines: There are specific timeframes you need to follow:   - 45 days to identify potential replacement properties after selling your current property.   - 180 days to close on the replacement property after selling the original property. 🔥4. Qualified Intermediary: 🔥 The IRS requires a third-party intermediary to handle the exchange process. This intermediary holds the proceeds from the sale until the new property is purchased to ensure compliance with IRS regulations. So make sure this is all setup before you sell - if you get the proceeds directly into your bank account you messed up the strategy! 5. Types of 1031 Exchanges:   - Delayed Exchange: Sell the current property and buy the replacement property within the allowed timeframe.   - Reverse Exchange: Buy the new property first, then sell the current one.   - Build-to-Suit Exchange: Use the proceeds from the sale to improve or renovate the replacement property. 6. Tax Implications: If you don't reinvest all the proceeds or if the new property has a lower value, you might owe taxes on the difference, known as "boot." 7. Depreciation Recapture: If you've claimed depreciation on the original property, the IRS may "recapture" the taxes you avoided, but this can also be deferred with a 1031 exchange. By using a 1031 exchange, real estate investors can continue to grow their portfolios and increase their returns without the immediate burden of capital gains taxes. However, this process is complex and requires careful planning, so working with a knowledgeable accountant or tax professional is crucial. #1031exchange #taxstrategy #moetheCPA

Prospect calls in looking to sell a $4.1M property (Net selling price) bought for $3.1M - They think they only have to find something worth $1M in gain to defer all the tax - doesn't work this way... Here is how you'd defer ALL taxes in this scenario To fully defer taxes in a 1031 exchange, you must reinvest all of the proceeds from the sale, not just the gain. This means you need to reinvest the entire $4.1 million from the sale of your property, not just the $1 million gain. Additionally, you must also replace any debt that was on the relinquished property with either new debt or additional cash in the replacement property. If you only reinvest $3 million, you will be subject to taxes on the remaining $1.1 million that was not reinvested. This includes capital gains taxes, depreciation recapture, and any applicable state taxes.

1031 #DropAndSwap #ReverseExchange One of the many commercial real estate nuances that an experienced broker and investor must navigate on a regular basis is the #1031Exchange. This topic can be elusive to many investors but in my humble opinion, a real estate investor should invest the time to understand the nuances of this section of the #IRS Section 1031 Code because it can save them massive amounts of money! Did you know that when two (or more) partners want to sell a property and part ways, we are able to do a "#DropAndSwap" in which one partner is added to the deed and then when the property is sold, equal proceeds are distributed to the LLC and the individual partner so that he or she can take their proceeds and do a 1031 exchange into another property? Were we to just have the partners sell the property without doing this, the entire gain on the property would be taxable unless a 1031 was done whereas here in this example each owner has their own half of the proceeds to do with whatever they see fit (i.e. 1031 or pay taxes on gains). Recently I was on the phone with a client and he had no idea that this was possible and thought he was either stuck in the partnership, or had to pay the taxes. Have a property you want to buy right now but aren't able to sell your current property prior to purchasing the new asset? No worries, we've got you covered! Another neat fact is that the 1031 exchange can actually be done in reverse! A #Reverse1031 occurs when an owner of like kind property purchases his or her replacement property BEFORE selling the relinquished property. The seller sets things up with the 1031 exchange accommodator, closes on the replacement property and then within 6 months must sell the relinquished property and now, assuming that there is no "boot" (leftover taxable proceeds) will completely defer taxes on the property they sell! Have other 1031 questions or want to learn more about net lease, reach out anytime! Encore Real Estate Investment Services

The 1031 exchange demystified: In simple terms, exchanging a depreciated property which is being sold at fair market value for another targeted property of equal value allows the gain to be passed on to the new property. But the potential depreciation recapture is passed on; & any suspended operated losses from k-1s are passed on also; ie. carried forward to offset future operating gains; cost segregation often results in unused losses which can’t be deducted because the passive owner/partner’s income is too high. If you sold the property outright, the suspended losses are added to the basis and thereby reduce the gain. The depreciation basis of the replacement property is the depreciated basis of the old property plus any new money paid to buy a higher value property. For example if a bld. is pending sale for 300k with a cost of 200k less 100k in depreciation (a 200k taxable gain), is exchanged for a property with a FMV of 400k requiring 100k in new cash to close, the replacement would have a basis of 300k-100k in depr. = 200k, not 400k. The 100k depreciation transfers to the new property, to be recaptured when it is sold. A 1031 makes sense if you roll the gains until you die and get the step-up in basis. Alas, there’s no recapture in death if you roll the gains right.

“Ron, I’m making $1.7M on this deal, but I don’t want to pay a cent in taxes.” That’s what a seller told me before listing his property. He’d heard of 1031 exchanges but didn’t understand the rules. He thought he could take his time. But the clock starts fast: 45 days to identify a new property. 180 days to close. We jumped in early, set him up with a qualified intermediary, and mapped out a clear plan. → Deferred all capital gains → Traded into a stronger asset → Walked away with more income and long-term upside Here’s what every investor should know: → A 1031 exchange lets you defer capital gains when you reinvest → Your replacement property must be equal or greater in value → The 45-day and 180-day deadlines are non-negotiable → You must use a qualified intermediary no exceptions Miss a step? You’ll owe the IRS. I’ve helped dozens of clients grow their portfolios with this strategy. If you’re thinking about selling, let’s plan it right. Before that clock starts ticking.