1031 Exchange Transactions
A 1031 tax deferred exchange is the IRS approved method that enables you to defer federal (and most state) capital gains taxes incurred on the sale of real estate investment property by regulating the reinvestment of proceeds in another investment property and properties. For individually held investments, the deferral can continue through any number of exchanges indefinitely. Upon death, the property will revert to the individual's estate. When a taxpayer dies, no gain is reported on depreciable personal property or real property transferred to his or her estate or beneficiary.
In order to qualify for the 1031 tax deferral, the properties sold and purchased must meet certain criteria. For example, both properties must be "like kind":
The tax code states: No gain or loss shall be recognized on the exchange of property.if exchanged solely for property of a like-kind which is to be held either for the productive use in a trade or business or for investment." The proceeds from the sale of an investment property must be reinvested into other real estate property held for investment in order to qualify for tax deferral. For example, farm land may be exchange for an office building and vice versa.
In addition, there are certain time and logistic requirements regarding the transaction itself.
Potential replacement properties must be identified within 45 days of the closing date of the sold property. Replacement properties must meet one of the following three rules: 1) up to three properties may be identified no matter what the value; 2) any number of properties may be identified as long as the combined fair market value (FMV) does not exceed 200% of the FMV of all sold properties; or 3) any number of the properties may be identified regardless of the FMV, provided that 95% of the value of identified properties is acquired. The closing on identified replacement property must take place within 180 days. A qualified intermediary must hold the proceeds of the sale of the first property until the closing on the replacement property.
1031 exchanges allow tax benefits and greater leverage (more dollars put to work) in the second purchased property than if the tax had been paid.
Tenant-In-Common (TIC) 1031 Exchange Concept
Tenant-In-Common (TIC) is a type of 1031 exchange in which an investor purchases a partial ownership in a larger, institutional-type property as a replacement investment property. For example, by choosing the TIC option, the typical investor is able to diversify his or her real estate holdings into properties that are leased to Fortune 500 companies, national retailers, or the United State Government. TIC replacement properties can provide credit-worthy tenants, a secure monthly income, stability, and growth potential. Investing in a TIC replacement property can provide passive long-term income, eliminate active property management, and alleviate the burden of being a landlord. Each co-owner receives an individual deed at closing for his or her undivided percentage interest in the entire property and has the same rights that a single owner would have.
To find out more about 1031 exchange transactions or Tenant-In-Common exchange transactions, contact Jack Mara of StoneGate Partners, LLC (617) 330-9009 extension 327.
