IRS 1031 Exchanges: How Commercial Property Investors Legally Defer
Paying Taxes
1031 EXCHANGES FOR BUSINESSES AND INVESTMENT PROPERTIES
In most cases, when someone sells a property and makes a profit, they’ll need to pay taxes immediately, However, U.S. tax laws provide an exception in which, if you use the proceeds from the initial sale to reinvest in a similar property, you can defer those taxes until later. Called a 1031 exchange, this tax deferral can have a variety of financial benefits for business owners and investors.
ARE YOU ELIGIBLE FOR A 1031 EXCHANGE?
1031 exchanges aren’t only available to individuals; in fact, other entities, like S corporations, C corporations, trusts, limited liability companies, partnerships, and other kinds of tax-paying organizations are eligible to request a 1031 tax deferral. The 1031 program is designed for business and trade-use properties, so personal-use properties, like homes and vacation homes, are not typically eligible (but may be if they are held for investment purposes).
For a 1031 exchange to work, technically, an individual or group cannot simply use money gained from the initial property sale to purchase a new, similar property instead, the two property sales have to be part of an ‘integrated legal transaction.’ In some cases, this means simply ‘swapping’ one property for another.
1031 DEFERRED AND REVERSE EXCHANGES: CAN THEY WORK FOR YOU?
In most cases, when someone sells a property and makes a profit, they’ll need to pay taxes immediately, However, U.S. tax laws provide an exception in which, if you use the proceeds from the initial sale to reinvest in a similar property, you can defer those taxes until later. Called a 1031 exchange, this tax deferral can have a variety of financial benefits for business owners and investors.
Another kind of 1031 exchange is referred to as a reverse exchange. This type of transaction also typically involves the use of a qualified intermediary an exchange accommodation titleholder, who can hold the title to a property for 180 days until it’s conveyed to a buyer.
WHAT ARE THE TIME LIMITS ON 1031 EXCHANGES?
According to IRS 1031 guidelines, there are two major limits on traditional 1031 exchanges. First, owners have 45 days from the sale date of their initial property to identify the property or properties they would like to replace it with. Second, the replacement property needs to be received with 180 days of the sale of the initial property, or by the income tax due date of the year the initial property was sold, whichever comes first. If either of these are not met, or if a participant tries “taking control of cash or other proceeds before the exchange is complete”, the entire transaction may become taxable immediately.
To learn more about how a 1031 exchange might be able to help you or your business, or to learn how to save money on title insurance and escrow services, simply contact the experts at Sterling Title Partner to learn more.