Things You Need To Know About 1031 Exchange

1031 exchange is a tax-deferred exchange in which property owned by an individual or business is exchanged for other like-kind property. Several restrictions apply to 1031 exchanges, including time limits on when the new replacement property must be purchased.

What does 1031 exchange reit mean?

A special kind of exchange (tax-deferred like 1031) can be accomplished as a 1031 Exchange REIT or tax-free exchange reit. This type of transaction is advantageous because it allows for the deferral of any taxes on capital gains and depreciation recapture and eliminates all limitations under which exchanges are usually subject. It is a result of the fact that in a 1031 exchange reit, no cash ever moves across state lines and becomes part of the deal.

1031 exchange reit & real estate investors

Capital gains taxes, depreciation recapture, and limitations on exchanges such as needing simultaneous closings or identifying potential properties more than 45 days before the exchange.

A 1031 exchange reit allows for a much more streamlined and efficient transaction. Many 1031 exchange REITs can be accomplished in just a few weeks instead of months with other types of exchanges.

1031 exchange reit and taxes

When investors sell an investment property that is not considered their primary residence, they can be subject to a tax of up to 25 percent on the gain realized from the sale.

A 1031 exchange reit does not allow for any cash out of pocket. Suppose capital gains taxes, depreciation recapture, and limitations were an issue in your transaction, or you want to defer these taxes or perhaps enjoy greater flexibility in what you can exchange for. In that case, you should consider whether a 1031 exchange reit makes the most sense for your investment strategy.

This article will discuss some of the more common mistakes made in 1031 exchanges and avoid them.

1. Failure To Carry Over Basis

Since the like-kind property is one where money cannot be “flowed” from the seller to the buyer, the individual or business should make sure he carries over his basis (the amount paid for the investment) when making an exchange. If this purpose is not carried out, the individual or business will have a taxable gain.

2. Not Using Qualified Intermediaries (QI)

If an entity is involved in the transaction before you purchase your new property, it must be a qualified intermediary that handles the exchange for you to claim 1031 exchange treatment.

3. Not Having A QI Agreement

If you do not involve a QI, you will be using “delayed” 1031 exchange treatment, and when the final property is sold, all of your gains will be taxed at once.

4. Selling The Old Property Too Soon (2 Year Rule)

It is one of the most common mistakes for individuals trying to do a 1031 exchange. If you sell the investment before selling your new investment, you will lose all of your tax benefits. It is why it may be best to go with a qualified intermediary who can handle all aspects of the transaction for you.

Bottom line

Several mistakes can be made in 1031 exchanges. Consulting with your qualified intermediary and tax advisor will help you stay on track with your 1031 exchange reit, so you don’t lose out on the benefits they provide.