|A 1031 EXCHANGE refers to the Internal Revenue Code Section 1031 tax code for a like-kind exchange to defer the incurrence of federal and general state income taxes on the capital gain. To qualify, the property owner must exchange real property (relinquished property) for another property or multiple properties of a like-kind (replacement property).|
If a property owner sells a multifamily building, not only can they exchange for another multifamily building, they also have the option to purchase a retail property, industrial, office or any other type of income producing property. The owner of the relinquished property must identify the replacement property or properties in writing to the intermediary within 45 days of the relinquished property’s sale. Within 180 days of the transfer of the relinquished property, the taxpayer must receive the replacement property.
BENEFITS OF A 1031 EXCHANGE
*Immediate tax avoidance as gain is deferred to a later date.
*Greater buying power using additional equity available because taxes are not due now.
*Increased income potential with replacement property in better location, more units, etc.
*Less management responsibility, such as with a Triple Net Lease (NNN) Property or Tenant-in-Common (TIC) Interest.
*Diversification as you can sell one large property to acquire several.
*Consolidation by selling several properties to acquire one.
*Expansion or relocation of a business or investment.
*Possible conversion to primary residence and eventually qualify for primary residence exclusion under Internal Revenue Code Section 121.