What Is a 1031 Exchange in Real Estate?

The Lake Havasu area has a lot of promise for CRE investing. It is a strong market with a lot of growth potential. However, CRE investors need to be savvy about their taxes, and one tax break with a lot of potential is a 1031 exchange. What is a 1031 exchange in real estate? Read on to learn the basics of 1031 exchanges.

What is a 1031 Exchange in Real Estate? The Basics for CRE Investors

The name 1031 exchange comes from section 1031 of the Internal Revenue Code. Investors and tax professionals call it a like-kind exchange. It allows investors to sell a property and reinvest the proceeds in a property of like kind. As long as the transaction meets the requirements, the investor can defer capital gains tax on the sale.

Defining Like-Kind Investments

A like-kind property is similar in nature or purpose. The rules concerning what counts as like-kind are broad. It doesn’t even need to be the same type of commercial real estate. For example, you could sell a strip mall and use the proceeds to buy a storage facility. While there are some exceptions, the primary distinction is that both properties are for business or investment purposes.

The Role of Intermediaries

One important point is that the investor can’t receive the sale proceeds in a 1031 exchange. The funds go to a qualified intermediary, who holds them in escrow. They hold the funds for the investor and purchase the exchange property on their behalf. Beyond compliance, a qualified intermediary can help ensure a smooth exchange for the investor.

Timing in a 1031 Exchange

These property exchanges have strict timing requirements. You must meet the timelines to ensure the exchange is valid. Otherwise, the investor must pay the capital gains tax even if they bought a like-kind property.

The first important deadline is to designate a replacement property. After the investor sells the first property, they have 45 days to designate a new property. The next important deadline is 180 days for closing on the new property.

Remaining Funds

In some cases, funds may remain after a 1031 exchange. If so, the intermediary releases the remaining funds to the investor after completing the exchange. Any remaining funds will be subject to capital gains tax as sale proceeds.

This post covers the basic details of a 1031 exchange. However, some exchanges are unique and may be subject to different rules. Investors should consult tax professionals and CRE experts when planning a 1031 exchange in Arizona.

Do you need commercial real estate services in Lake Havasu City? Click here to contact Randy Shuffler. He is a CCIM operating in the Lake Havasu City area. Whether you’re buying, selling, investing, or leasing, we can help. Reach out now to learn more.

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