The Tax Advantages of Conducting a 1031 Exchange

There are many benefits of conducting a 1031 exchange. Today, we’d like to talk specifically about how a 1031 exchange is useful from a tax perspective. In this article, we are going to discuss the numerous tax advantages of conducting a 1031 exchange of real estate.

Defer Your Capital Gains Taxes

The 1031 exchange was built on the idea of deferring capital gains taxes when selling property. In 2020, taxpayers are able to defer 100% of their capital gains tax when selling real estate, as long as they meet all the requirements set out in section 1031 of the Internal Revenue Code. Depending on the property involved, this can add up to a huge tax savings.

Keep Your Money Working

Ultimately, deferring your capital gains taxes means that you get to keep your money working hard for you over time. Instead of giving that money to the government, you can reinvest it into a replacement property and continue compounding interest over time. The economy at large benefits too, as 1031 exchanges encourage investment in the real estate market.

Thinking of Doing a 1031 Exchange? Act Now!

At CPEC1031, we have over two decades of experience in the 1031 exchange industry. Our qualified intermediaries can guide you through the entire like-kind exchange process and advise you every step of the way. Contact us today to learn more about the 1031 exchange services we offer and how we can help you with your next like-kind exchange. Find us at our downtown Minneapolis office, or at one of our numerous satellite offices around the country.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2020 Copyright Jeffrey R. Peterson All Rights Reserved

Tips for Deferring Taxes with a 1031 Exchange

1031 exchanges can save you a lot of money in capital gains taxes when you sell a piece of property. Here are three tips for deferring taxes with a 1031 exchange.

Start Early

The first tip is to get your 1031 exchange set up with a qualified intermediary well before you close on the relinquished property. Sadly, we often receive calls from folks that have already closed on the sale of their relinquished property, received the proceeds, and then decided they wanted to do a like-kind exchange. The horse is out of the barn if you don't get your 1031 exchange set up in advance of the sale.

Think Like a Chess Player

The next tip is to think like a chess player - two to three moves ahead at any time. You want to be thinking about “where am I going to land for a replacement property?” Real estate is kind of like a game of musical chairs. If you don't act quickly you may find that you don't have a chair to land on when the music stops. You want to be thinking ahead and locking up a replacement property before you have to identify during the 45-day identification period. Ideally it would be nice to lock up a replacement property even before you close on the sale of your old relinquished property.

Work with Your Team of Professionals

The third tip is to work with your team of professionals. Bring your whole brain trust together. Involve your accountant, your lawyer, your real estate professional, and your financial planner in this process. This may be one of the most important financial decisions that you ever make and by using your resources you can get the best advice and information.

• Start Your 1031 Exchange: If you have questions about the best way to approach your 1031 exchange, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

The History of 1031 Exchanges

Many people have questions about the history of section 1031. In this article we will talk about the origins of 1031 exchanges – how they came to be and what they look like today.

A 1031 History Lesson

Going back to 1921, there have been provisions in the Internal Revenue Code that have allowed for the tax-fee swapping for exchanges in property. These iterations of Section 1031 have survived the overhauls of the Internal Revenue Code of 1939, 1954, and the most recent comprehensive revision in Tax Reform Act of 1986.

The big development in the 1031 world came from the Starker decision wherein a non­simultaneous exchange occurred - see Starker v.United States, 602 F.2d 1341 (9th Cir. 1979). This was the first deferred exchange where a taxpayer sold a relinquished property and didn’t instantaneously receive the new replacement property, but instead received the replacement property subsequent to the disposition of the old property. Essentially, this was the first “deferred” or “delayed” exchange where the replacement property came in later.

The Benefits of a Deferred Exchange

The benefits of a deferred 1031 exchange are that you don't necessarily have to line up the stars so that you can sell the relinquished property and instantaneously receive your replacement property. Instead, under the current Treasury Regulations you can sell the relinquished property on day 1 and receive your replacement property up to 180 days thereafter.

Additionally, you don't have to contract directly with the same party to receive your replacement property. You can sell your relinquished property to party A, and receive your replacement property from somebody completely different, party B. The benefits of a deferred exchange are that you have much more flexibility in time and in the relationships with the parties to structure a clean sale of your relinquished property to a third party purchaser and structure a clean purchase from someone completely different up to 180 days after you sold your old property. This gives you much more flexibility to get deals done and to defer the taxes.

The modern Treasury Regulations also require you to designate or identify your new replacement properties in writing within 45 days after the closing of the sale of your old relinquished property. For more information on identification rules see our Primer on 1031 Identification Rules.

• Start Your Exchange: If you have questions about the history of 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2016 Copyright Jeffrey R. Peterson All Rights Reserved