1031 Exchange: What You Need to KnowMay 24, 2017
An April 2017 article in Financial Planning suggests that 1031 exchanges are becoming increasingly popular, thanks to a rise in property prices. As more property owners seek to take advantage of like-kind exchanges under IRS Code Section 1031, here’s what you need to know:
Benefits of a 1031 Exchange
A 1031 like-kind exchange allows a property owner to sell one property in “exchange” for purchasing another property or multiple properties, without incurring a tax liability. For example, this exchange can potentially allow you to:
- Acquire and dispose of properties to reallocate your investment portfolio without paying tax on any gain.
- Defer the tax on newly acquired properties and free up more money to invest. In effect, you receive an interest free loan from the federal government for the amount you would have paid in taxes.
- Hold the property for your entire life to permanently avoid taxes on the properties. Your beneficiaries will inherit the property at a “stepped up” basis equal to the value at the date of death and never have to pay income tax on the profit from the prior sale.
1031 Exchange Process
There are three main steps to completing a 1031 exchange:
- Before selling your property, retain a Qualified Intermediary (QI) to act as a fiduciary to receive the proceeds directly from the sale.
- Within 45 days after the sale, identify the property (or properties) to be purchased in writing to your QI.
- Close title on your replacement property within 180 days following the sale of the relinquished property.
Potential Tax Reform Implications
There is talk that 1031 exchanges might possibly be eliminated in President Trump’s tax reform. If that were to happen, the impact on investors would certainly be significant. Most experts agree that the likelihood of such a major change to the tax structure is relatively low, however, there are many moving parts to tax reform and it is still too early to tell what will happen.
A 1031 exchange requires a Qualified Intermediary, who holds the sales proceeds during the exchange period. The QI also provides guidance to help the property owner comply with the complex and time-sensitive IRS rules regarding the exchange.
Because of how involved the process can be, The Curchin Group has dedicated an entire arm of its business to serving as a QI for 1031 like-kind exchanges. Learn more about Curchin 1031 Exchange, LLC at www.curchin1031.com. To discuss your property and details of the 1031 process, contact Peter Pfister or Lynn Conover at 732-747-0500.