Deferring Taxes Through 1031 Exchanges
Are you looking for assistance deferring your taxes through 1031 exchanges? Look no further than our team at Coakley Realty.
What Is a 1031 Exchange?
A 1031 exchange, also known as a like-kind exchange, a delayed exchange, or a starker exchange, is a tax-deferment strategy that many investors are not familiar with. 1031 exchange comes from Section 1031 in the U.S. Internal Revenue Code, which allows you to defer paying capital gains taxes when you sell an investment property by reinvesting the proceeds into a like-kind property, or properties, of equal or greater value during a specific time frame. A “like-kind” property refers to assets that are considered to be the same type of property but do not need to be of the same quality to qualify. Not all 1031 exchanges require you to sell your property before you purchase a replacement property. A “reverse exchange” allows you to purchase a replacement property before the sale of your relinquished property.
and commercial real estate
Tax Considerations and Implications of a 1031 Exchange
Tax considerations are an essential factor when buying or selling commercial property. Fortunately, flexible investment tools such as 1031 exchanges help you avoid some of the most burdensome tax impacts of owning commercial property. While capital gains tax cannot be avoided entirely, a 1031 exchange can be a powerful wealth-building tool that preserves opportunities for property investors. A 1031 exchange should be included as part of any discussion where your property qualifies for such tax treatment.
The benefits that come with a 1031 exchange are relatively simple to understand, but the rules are complicated and subject to change. There are deadlines and limits to meet and multiple tax forms to file. Failure to follow 1031 exchange rules can trigger significant tax penalties, including being held liable for paying the taxes you hoped to defer, plus interest and fines. More serious 1031 violations, such as fraudulent backdating, often lead to more significant costs and stiff penalties.
In addition to tax advantages, a 1031 exchange offers other benefits such as business strategy protection, leverage into new properties, diversification, and optimizing cash flow. If you are considering a 1031 exchange strategy, it’s vital to understand how they work and to learn if your property or properties qualify for such a remedy.
It can be challenging for experienced and inexperienced investors alike to keep up with the various rules and guidelines of a 1031 exchange. If you want to perform successful 1031 exchanges for one or more properties, a smart move is to trust the expertise offered by professionals who understand them. Our team will gladly answer any questions you have about a 1031 exchange and whether it’s the right strategy for you.
Why Choose to Do a 1031 Exchange?
A 1031 exchange offers many advantages, including:
- You can defer payments of depreciation recapture and/or capital gains taxes.
- The value of the property may endure maximum appreciation.
- The property can be fully depreciated.
- The property can have leverage and increased cash flow.
- You can be free of managing multiple properties through consolidation.
How Can Coakley Realty Help You With Your 1031 Exchange?
Whether you already have your property under contract and are looking for an exchange property, or you are just starting the 1031 exchange process—Coakley Realty can assist you every step of the way!
Along with the ability to list your property for sale, Coakley Realty can identify many properties that could be suitable for an exchange. Our knowledge of the market and our in-depth databases will give you an advantage!
Coakley Realty can:
- Discuss your objectives to sell your current investment property that will be part of the exchange.
- List your investment property for sale.
- Identify properties for your exchange and represent you in a purchase.
- Preserve your right for a 1031 exchange in all necessary contracts.
- Connect you with a qualified intermediary (QI), a person or company that agrees to hold the funds from your relinquished property and transfer those funds to the seller of the replacement property you choose to purchase.
- Advise you on all deadlines in order to meet your tax-deferred exchange objectives.
Things to Remember About a 1031 Exchange
The taxpayer name must remain the same.
- You must follow the 180-day timeline once you relinquish your investment property.
- You must use a qualified intermediary.
- You must choose one of the three guidelines for the 45-day identification period:
- Identify up to three properties of any value with the intent to acquire at least one.
- Identify more than three properties with a combined value that doesn’t exceed 200 percent of the relinquished property’s market value.
- Identify more than three properties with a combined value that exceeds 200 percent of the relinquished property, knowing 95 percent of the combined market value of all properties identified must be acquired.