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Guide To The 1031 Exchange

Posted by MB Group on May 5, 2020 11:43:00 AM

The 1031 exchange is a powerful tool that can help you save immensely on taxes following the sale of a property. It's a tax-deferral program that allows you to sell a property and then reinvest the proceeds from the sale into another property of greater or equal value. 

In doing so, you'll keep more money in your pocket while deferring costly capital gains taxes. While the concept is relatively straightforward, 1031 exchanges are far from simple and can be very complex. Fortunately, the accounting experts at MB Group can help you navigate your way through 1031 exchanges to experience the benefits. Let's take a closer look at the 1031 exchange and how the Certified Public Accountants and advisors at MB Group can help you capitalize on the benefits. 

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A Closer Look at the 1031 Exchange

The 1031 exchange derives its name from the Internal Revenue Code Section 1031. Under section 1031, all profits1031 exchange or proceeds gained from the sale of a property are taxable. Because of this, the proceeds from the transaction must be received by a qualified intermediary — instead of to the property's seller.  The qualified intermediary then can transfer the proceeds to the seller of the replacement property.

All properties involved in the 1031 exchange must be like-kind, which is liberally interpreted to include almost all types of real estate properties, including those with substantial improvements as well as raw land. However, real estate investment trusts (REITs) or other types of securities don't qualify for 1031 exchange. Common examples of like-kind properties include:

  • Single-family rentals
  • Multi-family rentals
  • Raw land
  • Office buildings
  • Retail shipping centers
  • Storage facilities
  • Industrial facilities 
  • And more

Who Is a Qualified Intermediary?real estate investment

A qualified intermediary is someone or a company that facilitates the 1031 exchange by retaining funds involved in the transaction until they are transferred to the replacement property's seller. A documented "exchange agreement" between the qualified intermediary and you must be created to avoid you from having "constructive receipt" of the proceeds during the exchange.  

The qualified intermediary will ensure all equity is preserved and roles are followed during the process. With the goal of impartiality, the qualified intermediary shouldn't have any type of formal relationship with you or the other parties involved in exchanging properties. The qualified intermediary facilitates the tax-deferred exchange and acts as an independent third party to create a safe harbor established by Treasure Regulations. It's important for you to choose a qualified intermediary prior to closing on the sale of your property.                                                                                                                                       

How Does the 1031 Exchange Work? 

The first step in a 1031 exchange is for both properties to be held as either investment or business purposes. The appropriate status is proven via tax returns, including depreciation records, rental income, and intent. If you use the 1031 exchange, it's imperative you always have the necessary documentation in place in the event of an audit. 

The new property must adhere to certain standards, such as being of greater or equal value than the property sold. At the same time, there is a significant timeline any investor must keep. You have up to 180 days to finish the exchange, which starts the same day escrow closes on sale. And the IRS mandates the investor to identify plans to purchase on day 45. As the investor, you must describe the properties or property you are planning to use as the exchange replacement. 

Contact MB Group for 1031 Exchange Assistance

If you're looking to take advantage of the exceptional benefits of a 1031 exchange, the CPAs and advisors at the MB Group can help. Contact us today for 1031 exchange expertise.  

Topics: Taxes, Real Estate

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