1031 Exchange
Under Internal Revenue Code (“IRC”) § 1031, real estate investors may defer capital gains taxes by selling one investment property and reinvesting the proceeds into another of equal or greater value thereafter. A properly structured 1031 exchange can preserve capital; however, strict rules govern how and when these transactions must occur.
SERVICES
ELIGIBILITY & EXCHANGE STRUCTURING
Not every property transfer qualifies for tax deferral under Section 1031. Eligibility depends on the nature of the property, its intended use, and the taxpayer’s ownership structure. Proper planning before the sale is essential to ensure the transaction meets IRS ‘like-kind’ standards and avoids disqualification due to improper classification or timing.
IDENTIFICATION & TIMELINES
Strict statutory deadlines govern all 1031 exchanges: 45 days to identify potential replacement properties and 180 days to complete the transaction. Missing either deadline eliminates tax-deferral eligibility. Detailed documentation, early identification, and close coordination with intermediaries are vital from the moment the relinquished property closes.
PURCHASE & SALE AGREEMENTS
Purchase and sale contracts form the backbone of a successful exchange. Each must clearly demonstrate the taxpayer’s intent to complete a 1031 transaction and contain the appropriate assignment and intermediary language. Accurate drafting ensures the transaction aligns with IRS regulations and maintains the exchange’s validity.
REVERSE & IMPROVEMENT EXCHANGES
When a replacement property must be acquired or improved before selling the relinquished asset, the transaction becomes a reverse or build-to-suit exchange. These complex structures require the use of an Exchange Accommodation Titleholder (EAT) and adherence to IRS Revenue Procedure 2000-37. Precision in documentation and timing is essential to preserve tax deferral.
ENTITY & TITLE CONSIDERATIONS
Continuity of ownership is a fundamental requirement for a valid exchange. The taxpayer selling the relinquished property must be the same entity acquiring the replacement. Variations between individuals, LLCs, partnerships, or trusts can jeopardize eligibility if not properly structured. Accurate documentation ensures ownership consistency from start to finish.
TAX DEFERRAL & EXIT STRATEGIES
A 1031 exchange defers recognition of capital gains, but long-term planning determines how and when taxes will ultimately be paid or avoided. A proper strategy can incorporate refinancing, estate planning, and future disposition of assets to achieve maximum tax efficiency.
