1031 Exchanges provide taxpayers with a valuable opportunity to defer taxes that would otherwise be payable upon the sale of real estate or personal property held for productive use in their business or for investment. 1031 Exchange transactions are structured under the 1991 "Safe Harbor" guidelines provided by Internal Revenue Code Sections 1031 and Revenue Procedure 2000-37.
Until recently there's been no mechanism that would allow owners and operators of rental property, to sell the property that they have owned for many years and avoid paying the capital gains tax on the property?s sale while continuing to receive a stream of income after the sale. All of this changed with the advent of sponsors who are selling undivided fractional interests in Triple Net Lease real estate properties.
In a simple "Straightforward" 1031 Exchange, the investor contracts to sell qualifying property prior to purchasing Like-Kind Replacement Property and a Qualified Intermediary facilitates the exchange on behalf of the Client/Exchangor. There are five simple steps to complete a Straightforward Exchange transaction:
1. Exchangor arranges for the sale of the Relinquished Property and includes 1031 Exchange language in the sales agreement.
2. Exchangor enters into an Exchange Contract with TVPX to represent them as the Qualified Intermediary.
3. At the closing, rights in the contract to sell the Relinquished Property are assigned to TVPX as Qualified Intermediary, and the net sales proceeds are deposited into an escrow account to be subsequently used to purchase qualifying Like-Kind Replacement Property.
4. The Exchangor identifies potential Replacement Properties within 45 days of the closing of the Relinquished Property.
5. The Exchangor completes their 1031 Exchange within 180 days of the first closing by purchasing identified Replacement Property using the proceeds.
held in the escrow account. At the second closing, rights in the contract to purchase the Replacement Property are assigned to TVPX as Qualified Intermediary.
A "Reverse" Exchange transaction structured under Revenue Procedure 2000-37, allows Exchangors to control the timing and value issues with respect to the purchase of their Replacement Property if they need to purchase the Replacement Property prior to the sale of their Relinquished Property, and still have the transaction qualify for non-recognition of gain.
1. A buyer cannot be found for their Relinquished Property, and there is a contractual obligation or desire to purchase the Replacement Property prior to the sale of their Relinquished Property.
2. The investor wants to make improvements to the Replacement Property they are acquiring, to increase its value to an amount greater than the eventual sales price of the Relinquished Property. This
strategy allows the investor to structure a fully tax deferred Exchange transaction. Without making the improvements before the Exchange, a portion of the sales proceeds from the Relinquished Property would be taxable.
Any property held for investment or for productive use in a trade or business by a U.S. taxpayer potentially qualifies for a 1031 Exchange. This can include raw land, condominiums, multi-family buildings, commercial buildings, aircraft, heavy equipment or many types of tangible property that are held for investment or for productive use in a trade or business.
As an alternative to sole ownership of real estate, a 1031 Exchangor can invest in a large commercial property along with other unrelated investors, not as a partner, but as an individual co-tenant owner. This structure of ownership is referred to as an Undivided Tenants-in-Common Interest, or TIC. The TIC product is designed to accommodate the average Exchangor, allowing them to receive part ownership in an institutional-type property with a minimum investment that would normally be beyond their means if they were to try to purchase it alone. TIC Replacement Properties can provide the co-owners with investment grade tenants on a long-term lease, hands-off property management, monthly income, as well as growth potential through appreciation. There are risks associated with purchasing a TIC that the Exchangor and their tax advisors must fully understand before acquiring a TIC to complete an Exchange.