Types of 1031 Exchanges
Benefits of a 1031 Exchange
THE ESSENTIALS OF A 1031 EXCHANGE ROBERT G. HETSLER
Types of 1031 Exchanges
Not all exchanges are created equal. Although they all produce the same result – deferral of capital gains taxes – there are several different ways to execute an exchange. Which one you choose depends on your personal circumstances.
Simultaneous Exchange Original property is sold and replacement property purchased at the same time and in the same escrow office.
Delayed Exchange The investor must identify replacement property within 45 days of selling relinquished property and acquire the property within 180 days.
Personal Property Exchange – An investor sells one nonreal estate asset and replaces it with an identical nonreal estate asset within 180 days.
Improvement Exchange The replacement property may be builttosuit, improved or modified to the buyer’ s specifications. Also known as a Construction Exchange.
Reverse Exchange – This allows an investor to close on replacement property before the sale of the relinquished property is complete.
Benefits of a 1031 Exchange
IRS § 1031 is commonly referred to as the last available tax shelter for investment real estate. When a 1031 exchange is completed, the seller preserves all capital appreciation by avoiding the tax liability of both state and federal capital gains and recaptured depreciation. The full amount of the seller’ s capital appreciation can then be applied toward the acquisition of a new investment or business property.
With a 1031 exchange, a seller is often able to afford a more valuable investment property than had the investor followed the traditional sale and purchase route that incurs harsh tax liabilities. A 1031 exchange also allow investors to replace an underperforming property with something that will generate better return on investment, all while deferring capital gains tax.