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1031 Overview, 1031 TIC - 1031 Junction

WHAT IS IRC SECTION 1031?

Section 1031 of the Internal Revenue Code allows an owner of investment property
to exchange property and defer paying federal and state capital gain taxes (up to
15% Federal, 25% depreciation recapture and applicable state taxes) if they purchase
a “like-kind” property following the rules and regulations of the Internal Revenue
Code. This allows investors to use all of the sale proceeds to leverage into more valuable
real estate, increase cash flow, diversify into other properties, reduce management
or consolidate holdings.

WHAT IS “LIKE-KIND” PROPERTY?

There is some confusion regarding what type of property qualifies for a §1031 tax
deferred exchange. The Internal Revenue Code Section 1031 states that “no gain or
loss shall be recognized on the exchange of property held for productive use in a
trade or business or for investment if such property is exchanged solely for property
of like kind which is to be held either for productive use in a trade or business or for
investment.” “Like-kind” property can include, but is not limited to, any of the following,
provided it is held for investment:

• Single Family Rental
• Duplex
• Apartment
• Commercial Property
• Raw Land

For example, raw land can be exchanged for a single family rental, or apartments or a
commercial building. Properties can be exchanged anywhere within the United
States.

DOES AN EXCHANGE NEED TO BE SIMULTANEOUS?

No, contrary to what some property owners envision, a §1031 tax deferred exchange
is rarely a two-party swap. Most exchanges are delayed exchanges, whereby the Exchanger
has 180 days between the sale of the relinquished property and the closing
of the replacement property. They must identify the potential replacement property
(or properties) within 45 calendar days from closing on the relinquished property.

WHEN IS A §1031 EXCHANGE APPLICABLE?

It is applicable whenever a property owner intends to SELL any property that is not
their primary residence (and falls under the definition of “like-kind”) and plans to
BUY another “like-kind” property within 180 calendar days following the closing of
the relinquished property.

Paramount to any exchange is a competent and experienced Qualified Intermediary.
Asset Preservation is the entity which structures, guides and documents the exchange
transaction from beginning to end.