The Flip Board

My email has been bombarded with questions about 1031 Exchanges. Apparently, my post discussing this was somewhat of a huge hit. To date, I am still seeing hundreds of hits to this post even though it was written 5 months ago.  I guess anytime you talk about deferring paying taxes, people really perk up! Ok. I’ve always said that the customer is always right. So, now I am going to give you more of what you want.

Here is my list of things to remember if you are looking at utilizing Internal Revenue Code section 1031.

1. To qualify for this, the two properties in question must be of “like-kind”. This means they both must be real estate in nature, whether commercial or residential.  For example, you can’t exchange a 1500 square foot, single family house for a lot of 400 vehicles to sell.
2. You can do multiple properties, but why would you want to complicate things further? If you are exchanging multiple properties, your business is advanced enough to where you should have a staff lawyer and accountant working for you.
3. You do not need to have an immediate transfer of both properties. You simply have to identify the other property for exchange within 45 days of closing on the first property. Also you must acquire or close on the replacement property within 180 days of closing on the first property.
4. Get Help! Not all lawyers are versed in 1031 Exchanges. Find the ones that are.
5. Never forget Qualified Intermediaries. They are like your escrow, but used only for delayed 1031 Exchanges.  Your local Real Estate Investor club should have some good ones ready for you. If you are taking possession of the other property at the same time, don’t worry about QI’s.
6. One way to use a 1031 Exchange is to trade-up on a property.  This defers the capital gains tax.
7. If you try to trade-down on a property, you will lose the right to write-off the realized loss due to the sale. This defeats the purpose/need for a 1031 Exchange.
8. Remember, this is not a vehicle to get rid of problem real estate. It is merely a way to defer having to pay capital gains tax on a new purchase.
9. I will say it again… Get Help! Find an attorney who is well versed in 1031 Exchanges. Also, retain the services of a qualified CPA to handle your documentation. It doesn’t hurt to talk to the CPA too! (Unless his name is Bill L.  HAHAHA!)

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