Thanks to Internal Revenue Code (IRC), Section 1031, a properly structured 1031 exchange allows an investor to sell a property, to reinvest the proceeds in a new property and to defer all capital gain taxes. IRC Section 1031 (a)(1) states:
“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.”
To understand the powerful protection a 1031 exchange offers, consider the following example:
An investor has a $200,000 capital gain and incurs a tax liability of approximately $70,000 in combined taxes (depreciation recapture, federal and state capital gain taxes) when the property is sold. Only $130,000 remains to reinvest in another property.
Assuming a 25% down payment and a 75% loan-to-value ratio, the seller would only be able to purchase a $520,000 new property.
If the same investor chose to exchange, however, he or she would be able to reinvest the entire $200,000 of equity in the purchase of $800,000 in real estate, assuming the same down payment and loan-to-value ratios.
1031 Exchange Process
Timing is important. Certain actions must be taken in sequence and exchanges must be completed within strict time limits.
acquire the Relinquished Property from the Exchanger and transfer it to the buyer (by direct deed from Exchanger to buyer), and
to acquire the Replacement Property from the seller and transfer it to the Exchanger (by direct deed from seller to Exchanger).
Also prior to closing the sale of the Relinquished Property, the Exchanger must assign rights under the Relinquished Property sale contract to the Qualified Intermediary and provide notice of assignment to the buyer.
At closing, net proceeds from the Relinquished Property sale (“exchange funds”) are paid directly to the Qualified Intermediary to be held in a separate account for the benefit of the Exchanger until used to purchase Replacement Property.
The Exchanger has 45 days from the date the Relinquished Property is transferred, to identify potential Replacement Properties. Identification must be specific and unambiguous, in writing, signed by the Exchanger, and delivered to the Qualified Intermediary or another party to the transaction as permitted by Treas. Reg. §1.1031(k)-1(c)(2) prior to the end of the 45-day Identification Period. The list of identified potential Replacement Properties cannot be changed after the 45th day; the Exchanger may only acquire from the list of identified properties. If no property is identified, the exchange funds will be returned to the Exchanger after the 45th day.
Prior to closing the sale of the Replacement Property, the Exchanger must assign rights under the Replacement Property purchase contract to the Qualified Intermediary and provide notice of assignment to the seller.
The Exchanger authorizes Qualified Intermediary to wire funds directly to the seller or closing agent for purchase of Replacement Property, and the seller transfers title directly to the Exchanger, completing the exchange.
Purchase of Replacement Property must be completed by the earlier of the 180th day after transfer of the first Relinquished Property or the due date (including extensions) for filing Exchanger’s tax return. Any unspent exchange funds will be returned to the Exchanger at termination of the exchange.
The Net Lease Group can provide you with access to several Qualified Intermediaries to ensure that your exchange complies with the IRC’s rules and regulations that govern 1031 exchange transactions.
To discuss how NLG’s Private Client Services team can assist you, please email us at firstname.lastname@example.org.
The Net Lease Group does not provide tax advice or counsel. Please consult with a qualified accountant, attorney or tax professional.
The Net Lease Group’s 1031 Concierge™
The Net Lease Group’s 1031 Concierge™ service advises and assists real estate owners and investors with the disposition and acquisition of commercial real estate while satisfying I.R.S. rules and regulations regarding tax deferred like-kind exchanges as detailed in section 1031 and 1033 of the Internal Revenue Code.
The Net Lease Group’s 1031 Concierge™ service evaluates, selects, negotiates, acquires and finances net lease investment assets of all types to satisfy tax deferred 1031 and 1033 like-kind exchanges on behalf of NLG’s clients.
NLG’s 1031 Concierge™ Provides You With Personal Service, Knowledge, Experience And Expertise
NLG’s 1031 Concierge™ provides the following services and benefits to make your 1031 exchange an efficient, stress-free, and enjoyable process:
- Analyze your exchange need(s),
Create a tailored exchange strategy,
- Provides you access to the largest pool of net lease investment properties (both on-market and off-market, double net and triple net, cash flowing and zero cash flow structures),
- Analyze and identify the properties that meet your investment criteria and exchange needs,
- Draft, submit and negotiate offers on your behalf,
- Manage your acquisition to closing, and if needed,
- Source debt for your acquisition.
How NLG’s 1031 Concierge Works:
- Complete the short Investor Profile form
- Discuss your exchange needs and investment criteria with your personal 1031 Concierge™
- Your 1031 Concierge™ will plan and execute your exchange strategy all the way to a successful closing and satisfactory tax deferred exchange