Whenever you sell business or investment property and you have a gain, you generally have to pay tax on the gain at the time of sale. IRC Section 1031 provides an exception and allows you to postpone paying tax on the gain if you reinvest the proceeds in similar property as part of a qualifying like-kind Exchange.
The Exchange can include like-kind property exclusively or it can include like-kind property along with cash, liabilities and property that are not like-kind. If you receive cash, relief from debt, or property that is not like-kind, however, you may trigger some taxable gain in the year of the Exchange. There can be both deferred and recognized gain in the same transaction when a taxpayer Exchanges for like-kind property of lesser value.
What Is ‘Like Kind’ Property?
Properties are of like-kind if they’re of the same nature or character, even if they differ in grade or quality. Real properties generally are of like-kind, regardless of whether they’re improved or unimproved. For example, an apartment building would generally be like-kind to another apartment building.
However, real property in the United States is not like-kind to real property outside the United States.
Types of 1031 Exchanges:
Delayed Exchanges: The delayed Exchange is common and straightforward: the Exchangor relinquishes property before he acquires property. In other words, the property the Exchangor owns (called the “relinquished” property) is transferred first. The property the Exchangor wishes to own (called the “replacement” property) is acquired second.
Reverse Exchanges: The Reverse Exchange is the opposite of the Delayed Exchange. A Reverse Exchange allows the Exchangor to acquire property first and relinquish property second. In other words, the Reverse Exchange allows an investor to acquire a new property today, when an excellent investment may be available, and sell other property later when a better price might be obtained. This greatly expands the ability of the investor to take advantage of changes in the marketplace and to improve his or her investment position.
Improvement Exchanges: An Improvement Exchange allows the investor to construct the “perfect” replacement property in order to acquire precisely what is desired. Improvements can be as simple as repairs to existing structures or as complex as ground-up new construction. The Improvement Exchange opens up many opportunities to the savvy investor, even the possibility of improvements to property already owned.
Blended Exchanges: The blended Exchange refers to combining different Exchange formats (delayed, reverse and improvement) into one Exchange. This approach allows for further 1031 Exchange flexibility, particularly when more than two properties are involved in the Exchange. Please contact Equity Advantage and speak with a facilitator to discuss how your 1031 Exchange may be structured to accomplish your investment goals.
What About Improving My Existing Property?
Often investors inquire whether they can use Exchange proceeds to make improvements to property already owned. Although not considered a common option, there are several “liberal” letter rulings that recognize this strategy as applicable through Internal Revenue Code 1031.
Equity Advantage has facilitated many improvement Exchanges of this format and upon request, will provide information to support this approach.
The Guys With All The Answers…
David and Thomas Moore, the co-founders of Equity Advantage & IRA Advantage
Whether working through a 1031 Exchange with Equity Advantage, acquiring real estate with an IRA through IRA Advantage or listing investment property through our Post 1031 property listing site, we are here to help Investors get where they want to be. Call them today! 503-635-1031.
