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What Are the Requirements of a 1031 Exchange?

If you are considering a 1031 exchange, you should talk with a Plymouth Meeting commercial real estate attorney first. A 1031 exchange can have significant tax advantages and can allow you to grow your portfolio of investment properties so your real estate holdings become ever more valuable. However, there are strict requirements for a 1031 exchange and you do not want to make any mistakes, as errors and problems could end up costing you thousands of dollars. 

Curley & Rothman, LLC understands the rules for 1031 exchange transactions. Our legal team can provide you with advice on whether you are eligible for a 1031 exchange and on whether this exchange is the right choice for you or not. We can also help you throughout the process to ensure you comply with all requirements so you can take advantage of the tax savings. If you're considering a real estate transaction and a 1031 exchange is a possible option, contact us today to talk to a Plymouth Meeting commercial real estate attorney who can provide help you need to structure the transaction correctly.

Requirements for a 1031 Exchange

1031 exchanges get their name from the section of the tax code which provides a tax break. As the Internal Revenue Service explains, capital gains taxes are usually required on the profits when a business or investment property is sold. However, Internal Revenue Code section 1031 creates an exception. Under this exception, you can defer tax on the gain if you reinvest the proceeds from the sale in a similar property investment.

A 1031 exchange is also called a Like Kind exchange, and the ability to defer taxes under section 1031 requires that you comply with myriad requirements established by the IRS. Some of the requirements for a 1031 exchange include:

  • The same tax payer is entering into both transactions. The name which appears on the property title which is sold must also be the same name that appears on the tax return and the same name which appears on the title of the newly purchased property.
  • The replacement property has to be identified: Within 45 days, you must provide the address of potential replacement properties.
  • The replacement property has to be purchased. The replacement property has to be purchased within 180 calendar days of the date of closing of the first transaction.
  • The exchange has to be a like-kind exchange. This means the new property has to be similar to the old property. However, it is sufficient to include like-kind property and property that is not like-kind. For example, if you sell a commercial real state building and obtain a commercial real estate building as well as cash, you could still receive some tax benefits, although there may be some taxable gains in the first year of the exchange.
  • The new property has to be equal to, or greater in value than, the value of the property which was sold. If the new property is worth less than the property which was sold, you have to pay the difference. The equity and debt for the new property also has to be greater than the equity and debt in the property that was sold.

Section 1031 exchanges can help individuals to save taxes, but S-corporations, Corporations, limited liability companies, trusts, and other taxpaying entities can also take advantage of tax savings provided by Section 1031 of the Internal Revenue Code.

Is a 1031 Exchange Right for You?

Deferring taxes using Section 1031 can make it much easier for you to increase the value of your investments. As a result, many people find that a 1031 exchange is a very useful took for purchasing investment properties. You can start with a smaller property and then use the equity you have built up in that smaller property to finance a larger purchase without having to pay taxes on gains. However, you do need to be aware that the rules can get complicated. A Plymouth Meeting commercial real estate attorney can help you to ensure that you follow all requirements and that a 1031 exchange is the right choice for you.

How Can a Plymouth Meeting Commercial Real Estate Attorney Help?

A Plymouth Meeting commercial real estate attorney can provide you with insight into whether you are eligible to take advantage of the benefits of a 1031 exchange. Curley & Rothman, LLC can also help during every phase of your real estate transactions so you do everything properly and never put your tax savings at risk.

To find out more about the requirements for a 1031 exchange and about how we can assist you, give us a call today at 610-834-8819 or contact us online.

Real EstateScott Rothman