REAL ESTATE AND 1031 EXCHANGE

A tax deferred 1031 exchange of property (also known as a Starker exchange) has been part of the IRS tax code in some form since the 1920’s.

You may sell certain investments and defer all capital gains taxes by moving the sale proceeds into another “like kind” investment within very specific time frames and following certain guidelines.  In general, assets must be held for a productive use in trade, business or as an investment, such as real estate.  Assets that do not qualify for 1031 exchange include stocks, bonds, notes, partnerships and a variety of other investment types.  It is important to note that a 1031 exchange in and of itself is not a securities transaction, although securitized real estate meeting certain thresholds as outlined by the service may be used as suitable like-kind replacement property for exchange purposes [1].

Rental properties must be exchanged solely for like kind properties, meaning any real estate that is purchased for investment.  A home purchased as a primary or secondary residence would not qualify as investment property and be ineligible for a 1031 exchange as a relinquished or replacement property.    Like kind property includes developed or undeveloped real estate, but need not be identical in type.  As an example you could exchange a single family rental home for an office building. The value, equity and debt, if any, on the replacement property (purchased property) must be equal to or greater in value than the relinquished property (sold property).

You may not directly receive any funds from the sale of the relinquished property without paying capital gains taxes or realizing any depreciation recapture on those funds.

The IRS provides specific and complete guidelines in their Publication 544, which may be found on the IRS website.  To avoid any financial loss, very stringent timing guidelines are required.  During the exchange process you will need to place your proceeds with a Qualified Intermediary (QI).  Be aware, there will be a fee paid to this intermediary for their services.  QI services are unrelated to the advice and service provided by Archer. We recommend that you contact your tax advisor for details.