1031 Exchanges

If you own an investment property and you are looking to sell that property and use the proceeds to invest in another, then you maybe able to defer any capital gains on the sale of the original property. This process is called a 1031 Property Exchange. There are 4 different types of 1031 exchanges that can be performed:

• The simplest type of exchange that can be performed is a Simultaneous Exchange. This is where the closing of the original property and the new property occur on the same day.

• If the closing of the purchased property occurs after the closing for the property sold then this is called a Delayed Exchange. It must be noted that there are strict timelines laid out by the government that need to be followed when performing this type of exchange.

• If the closing of the property sold occurs after the closing for the one purchased then this is called an Reverse Exchange. This process usually involves an intermediary who holds the title of the new property until such time that the sale of the old property is completed. Once the sale is complete the title can be transferred to the person wanting to perform the 1031 exchange.

• The last type of exchange is used when the person wants to perform improvements to the new property before completing the 1031. This is called an Improvement Exchange and is usually performed when you want to bring the value of the new property up so it is greater than the old property, so that you do not need to pay capital gains.

There are certain restrictions regarding 1031 exchanges. The first restriction is that all the names on the title for the original investment property must also be on the title of the new property, i.e. you cannot remove someone from the title. There are also some restrictions regarding the type of property that can be used, you cannot perform an exchange if the property is your personal residence, is a fix / flip, or the property is purchased for resale.

The last thing to note about 1031 exchanges is that it is only a deferral of Capital Gains Tax, when you sell your investment property you will have to pay tax on the combined gain of all the properties for which you have performed an exchange.

If you need more information then please refer to section 1031 of the United States Inland Revenue Code

We advise you to consult a real estate tax specialist before undertaking any real estate transaction based on a 1031 exchange.