1031 EXCHANGE FREQUENTLY ASKED QUESTION'S

Our Frequently Asked Question's page will introduce you to the very basics of the 1031 Exchange. For more specific information regarding 1031 Exchanges, including 1031 Reverse Exchanges, 1031 Delayed Exchanges and 1031 Personal Property Exchanges, please see our services page or call Advanced Property Solutions at
1-877-815-1031 for a FREE consultation.

WHAT IS A 1031 EXCHANGE?

In a normal property transaction, the property owner is taxed on any gains realized from the property sale. However, through a Section 1031 Exchange, the tax on the gain is deferred indefinitely.

Section 1031 of the Internal Revenue Code (IRC) states:

"No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment, if such property is exchanged solely for property of like-kind which is to be held either for productive use in a trade or business or for investment."

Thus, a 1031 tax-deferred exchange is a method by which property owners trade one or more "owned" properties for one or more "new" properties of "like-kind," while deferring the payment of federal income taxes and some state taxes on the transaction.

The theory behind the 1031 Exchange is that when a property owner reinvests the sale proceeds into a new property, the economic gain has not been realized in a way that generates funds to pay taxes. Simply stated, the taxpayer's initial investment has remained the same; only the form of property has changed (e.g. a vacant lot exchanged for an apartment) thereby making it unfair to to force the taxpayer to pay tax on what amounts to only a "paper" gain.

Note, however, the like-kind exchange under Section 1031 is tax-deferred, not tax-free. Once the replacement property is ultimately sold (and not as part of another 1031 Exchange), the original deferred gain, in addition to any further gains realized since the purchase of the replacement property, is subject to tax.

CALL 1-877-815-1031 FOR A MORE DETAILED EXPLANATION.

CAN I QUALIFY FOR THE 1031 EXCHANGE?

To fully defer all capital gain taxes, the property owner must meet the following two requirements:

1. All 1031 Exchange Proceeds MUST be Reinvested - If the property owner does not reinvest all of the exchange proceeds from the sale of the property, the balance received is considered "cash boot," and the capital gains may be taxed on that amount.

2. The Debt of Property Acquired MUST be the Same or Greater - If the property owner does not acquire a replacement property with debt equal or greater to the relinquished property, the property owner is relieved of a debt obligation, which is known as "mortgage boot." The IRS calls this reduction in debt a "benefit" to the property owner, and thus, is taxable - unless it is offset by adding equivalent cash to the replacement property purchase.

WHAT DOES "LIKE-KIND" MEAN?

I'm sure you have noticed the word "like-kind" used in both the IRS Code for a Section 1031 Exchange, as well as Advanced Property Solutions' 1031 Exchange summary.

The common misconception regarding "like-kind" is that the exchanged properties must be of the exact same property type. For example, vacant land can only be exchanged for vacant land. However, the reality of a "like-kind" property is far more flexible. Any "real property" held for investment or any "real property" used in a trade or business can be exchanged for any other "real property" held for investment or any other "real property" used in a trade or business. Thus, there is much leeway when using the term "like-kind."

WHAT IS A QUALIFIED INTERMEDIARY?

A Qualified Intermediary (QI) is any intermediary that has entered into a qualified intermediary withholding agreement with the IRS.

In the case of IRC 1031 Exchanges, where business or investment property is exchanged for "like-kind" property, the exchange MUST NOT involve a receipt of cash for the property relinquished. Thus, the use of a Qualified Intermediary can facilitate the exchange using escrow accounts. This type of intermediary (Advance Property Solutions, for example) promises to return the proceeds of the exchange to the transferor of the property. These proceeds are then used to purchase a replacement property of "like-kind."

HOW CAN I GET STARTED?

1. As always, we recommend you speak to your accountant and/or legal advisor before embarking on this process.

2. Contact Advanced Property Solutions (APS) at 1-877-815-1031 at any time before closing on your relinquished property for a FREE consultation. APS can prepare all necessary exchange documentation as well as coordinate with the escrow holder/closer, all Real Estate Agents and Brokers, and all tax and/or legal advisors. APS pricing is individualized based on the size of the property owner's interests. For smaller interests there may be a small fee, however for larger interests there is NO fee.