| What is a 1031 Exchange? |
A 1031 Exchange is a vehicle created by the IRS that allows a property owner to defer payment of capital gains tax from the sale of investment property. The sale proceeds are placed into an Exchange account with a qualified intermediary, such as Allied 1031 Exchange, and are then used to acquire new investment property.
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| Why Exchange? |
By deferring payment of capital gains tax, a property owner will have more capital available to acquire new investment property. This will allow the investor to purchase more expensive property and/or receive greater cash flow on an income producing investment.
For Example:
|
Without Exchange |
With Exchange |
| Sale Proceeds: |
$500,000 |
$500,000 |
| Original Equity: |
$100,000 |
$100,000 |
| Capital Gain: |
$400,000 |
$400,000 |
| Capital Gains Tax: (25%)* |
$100,000 |
$0 |
| Available Capital: |
$400,000 |
$500,000 |
* Capital gains tax rates will vary between states. |
| What type of property qualifies? |
| The IRS requires that the properties exchanged be of ‘like-kind’ and must be ‘held for investment.’ In general, any real property, other than one’s primary residence, is considered to be ‘held for investment.’ For purposes of a 1031 Exchange, all real estate qualifies as ‘like-kind.’ For example, an office building may be exchanged for raw land, raw land may be exchanged for a rental property, etc. |
| What is the timing involved with an Exchange? |
The exchanger has 45 calendar days from the close of escrow on the relinquished property to identify up to 3 replacement properties. The exchanger must then acquire at least one of these properties within 180 calendar days from the close of escrow on the relinquished property. It is possible to identify and purchase more than 3 replacement properties, provided certain guidelines are followed.
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| Can the exchanger receive a portion of the sale proceeds? |
| Yes, the exchanger can receive a portion of the sale proceeds. This is referred to as ‘boot.’ However, this portion will be subject to capital gains tax. The remaining proceeds held in the Exchange are still tax-deferred. |
| Why is a Qualified Intermediary necessary? |
| The exchanger may not have ‘constructive receipt’ of the sale proceeds and therefore, the IRS requires the use of a Qualified Intermediary for all 1031 Exchange transactions. The Qualified Intermediary holds the funds on behalf of the exchanger. The funds are then released when new investment property is acquired. |
| What happens when the new investment property is sold? |
| When a real estate investor sells a property that was acquired in a 1031 Exchange, the deferred capital gains tax, as well as any new capital gains tax, will be due. However, the investor may enter into another 1031 Exchange and continue to defer payment of all capital gains tax. |
| Can I be confident my money is secure? |
| Yes, you can be confident that your money secure. Allied 1031 Exchange is licensed and bonded with the state of Nevada to act as a Qualified Intermediary for 1031 Exchanges. In addition to meeting state requirements, we have a Fidelity Bond of One Million Dollars-per-occurrence to ensure the security of our customer's funds. All funds held are deposited into segregated accounts with a publicly-traded FDIC insured bank. Click here to view our fidelity bond. |
