1031 Tax Deferred Exchanges

Exchange now, pay later

A 1031 Exchange is a specialized exchange of property that allows investors to defer capital gains. The specifics of 1031 Exchanges are detailed in the Internal Revenue Code. While a taxpayer’s personal residence does not qualify, many other types of property—both real property and other holdings—can be exchanged. With the burden of capital gains tax deferred, the investor has additional funds available to invest in another property.

The exchanged holdings must be of like type and like value. According to the Federation of Exchange Accommodators (FEA), a professional trade association: “The theory behind Section 1031 is that when a property owner has reinvested the sale proceeds into another property, the economic gain has not been realized in a way that generates funds to pay any tax. In other words, the taxpayer's investment is still the same, only the form has changed (e.g., vacant land exchanged for apartment building). Therefore, it would be unfair to force the taxpayer to pay tax on a ‘paper’ gain.”

Section 1031 specifies the types and numbers of properties that qualify as well as those that are excluded, defines the types of exchanges, and details the requirements for a valid exchange, including time restrictions and other holding requirements.

One of the requirements for 1031 exchanges is that the investor must not ever be in receipt of funds or sale proceeds involved in the exchange. To meet this requirement, the investor uses the services of an independent Qualified Intermediary (QI), also known as an "accommodator" or "exchange facilitator."

Again, according to FEA: “When the taxpayer engages the services of a QI, pursuant to an exchange agreement, the IRS does not consider the taxpayer to be in receipt of the funds. The sale proceeds go directly to the QI, who holds them until they are needed to acquire the replacement property. The QI then delivers the funds directly to the closing agent who deeds the property directly to the taxpayer.
“Without a QI, and pursuant to an exchange agreement, the IRS may not define a transaction as an exchange, thereby making it ineligible for tax deferment status.”

IRS regulations regarding 1031 exchanges are clear but complex. If you are considering a 1031 exchange, I would be happy to talk with you about investment properties and to refer you to a skilled accommodator who can handle your exchange. Please contact me at Coco@LACondoLifestyles.com or 310-278-6033

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