Want To Know More About 1031 Exchanges? How To Use 1031 Exchanges to Grow Your Real Estate Empire

In my journey as an investor through the world of finding and investing in commercial and residential properties, I came across a thing called a 1031 Exchange. At first, I didn’t know what this vehicle was. What is a 1031 Exchange, I asked? Briefly, it is a way to defer taxes on profit from the sale or exchange of real estate. I will expand on the point and make it clear what a 1031 tax exchange means in terms of a sale/exchange. At first, I didn’t really understand anything about it, but the more I wanted to learn about 1031 Exchange , the more information I could find about the subject and the more expert people I could find to help me do these types of transactions.

First, there are very strict rules about a 1031 Exchange. A 1031 Exchange company or facilitator normally handles the 1031 Exchange transaction. They monitor the exchange process, making sure all the proper paperwork is completed and with in the time line set by the IRS. They are also the keepers of the funds from the sale to the purchase of the next property. There are whole companies that specialize in 1031 Exchange s and you may also find that your title company or attorney knows how to handle these transactions.

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By definition, a 1031 Exchange is:

The exchange of business or investment property solely for business or investment property of a like kind, no gain or loss is recognized under Internal Revenue Code Section 1031. If, as part of the exchange, you also receive other (not like kind) property or money, gain is recognized to the extent of the other property and money received, but a loss is not recognized. Meaning, if you sell a property and use part of it to buy another property (that part of the gain is not taxed) and you then take part of the funds and buy a car, the funds used to buy the car are taxable. So, you see, learning about 1031 Exchange can be a valuable tool in your investor tool belt.

So, when talking about a 1031 Exchange, the transaction or exchange has to be like kind. In other words, real estate for real estate, whether residential to residential or residential to apartments or an office building, it is all real estate. In addition, there are time limits on finding the exchange property and then closing on the property.

The timeline about a 1031 Exchange is best laid out in three steps:

Step 1: The sale of the original property is the starting date; this sale of the property is what starts the 1031 clock.

Step 2: Identification of the replacement property or properties have to occur within 45 days. No extensions, no exceptions.

Step 3: Purchase replacement property or properties within 180 days after the original sale.

When talking about a 1031 Exchange, there are also financial restrictions on the number of properties and dollar amount for which you can exchange. There are basically three restrictions you need to know about and learn more about.

Those three restrictions are known as:
- The three-property rule
- The two hundred percent rule
- The 95% rule

The rules surrounding these three restrictions are somewhat technical in definition so, I highly recommend that you research them in detail to find out more about how they really work and impact any 1031 Exchange you would plan to do.

You can get answers to these by looking up their definitions on the web but I’d also highly recommend you discuss these with your real estate 1031 Exchange expert and/or attorney to fully understand them and their impact to any 1031 Exchange you may do.

So, when thinking about 1031 Exchange, you should make sure you are following the guidelines and find a 1031 Exchange company that knows and fully understands everything about a 1031 Exchange and especially the IRS guidelines for a 1031 Exchange. Make sure you get good legal advice and follow all the Internal Revenue Code.

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I know this subject can be a little dry, but in the end, it will not only save you time and money but, it can help keep you out of any bad transactions that could be very costly to you in many ways. If you plan on doing a 1031 Exchange, make sure you follow the rules and that you use a very reputable and established company. Have fun as you grow your real estate empire and defer those taxes.