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1031 Exchanges

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Roswell Escrow has been offering 1031 Exchange services for over 15 years. We are knowledgeable in all areas of the exchange process and have acted as Qualified Intermediary for hundreds of clients. We will help guide you through the exchange process with detailed consultations to help you meet the necessary requirements of a legal exchange.

 

What is a tax-deferred exchange?

In a typical transaction, the property owner is taxed on any gain realized from the sale. However, through a Section 1031 Exchange, the tax on the gain is deferred until some future date.

 

Section 1031 of the Internal Revenue Code provides that no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business, or for investment. A tax-deferred exchange is a method by which a property owner trades one or more relinquished properties for one or more replacement properties of "like-kind", while deferring the payment of federal income taxes and some state taxes on the transaction.

 

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.

 

The like-kind exchange under Section 1031 is tax-deferred, not tax-free. When the replacement property is ultimately sold (not as part of another exchange), the original deferred gain, plus any additional gain realized since the purchase of the replacement property, is subject to tax.

 

What are the benefits of exchanging vs. selling?

arrowA Section 1031 exchange is one of the few techniques available to postpone or potentially eliminate taxes due on the sale of qualifying properties.

 

arrowBy deferring the tax, you have more money available to invest in another property. In effect, you receive an interest free loan from the federal government, in the amount you would have paid in taxes.

 

arrowAny gain from depreciation recapture is postponed.

 

arrowYou can acquire and dispose of properties to reallocate your investment portfolio without paying tax on any gain.

 

What are the requirements for a valid exchange?

arrowQualifying Property - Certain types of property are specifically excluded from Section 1031 treatment: property held primarily for sale; inventories; stocks, bonds or notes; other securities or evidence of indebtedness; interests in a partnership; certificates of trusts or beneficial interest; and choses in action. In general, if property is not specifically excluded, it can qualify for tax-deferred treatment.

 

arrowProper Purpose - Both the relinquished property and replacement property must be held for productive use in a trade or business or for investment. Property acquired for immediate resale will not qualify. The taxpayer's personal residence will not qualify.

 

arrowLike-Kind - Replacement property acquired in an exchange must be "like-kind" to the property being relinquished. All qualifying real property located in the United States is like-kind. Personal property that is relinquished must be either like-kind or like-class to the personal property which is acquired. Property located outside the United States is not like-kind to property located in the United States

 

arrowExchange Requirements - The relinquished property must be exchanged for other property, rather than sold for cash and using the proceeds to buy the replacement property. Most deferred exchanges are facilitated by Qualified Intermediaries, who assist the taxpayer in meeting the requirements of Section 1031.

 

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During a typical 1031 Exchange, Roswell Escrow, will create all the necessary paperwork throughout the entire process. We work with the title companies and/or attorneys on the sale of the relinquished property to ensure the exchange starts off correctly. A trust account in the name of your exchange is set up and all funds are put into that account with complete transparency so you always know where your money is. Because 1031’s have a very strict time limit, we make sure everything is done by the book.

 

Roswell Escrow strongly recommends the consultation of a knowledgeable CPA or tax attorney when entering into a 1031 Exchange.

 

ROSWELL ESCROW - GETTING STARTED ON A 1031 EXCHANGE

 

Still have questions? Call our office today and speak with a helpful representative. (575) 622-3513.