Last December, the “Tax Cuts and Jobs Act” was signed into law. 1031 exchanges are still alive and well and a good option for investors selling commercial real estate and looking to defer capital gains from those sales. Here are some FAQs to help guide you and your business.
What is a 1031 Exchange? Internal Revenue Code Section 1031 allows owners of investment property to sell or relinquish certain qualified property and reinvest proceeds from that property in a replacement property, subject to time limitations and other regulations.
How might a 1031 Exchange benefit me? Deferral of ordinary income, depreciation recapture and/or capital gain taxes frees up funds to invest in other/additional properties. 1031 Exchanges can be a wealth building tool in terms of cash flow and net worth increases.
Can I use a 1031 Exchange to swap my primary residence for another home? No. A 1031 Exchange is not for personal use; only for investment and business property.
Can I use a 1031 Exchange to exchange personal property, such as machinery, equipment or vehicles? No. The “Tax Cuts and Jobs Act” signed into law on December 22, 2017, which took effect on January 1, 2018, repeals like-kind exchanges for all tangible and intangible personal property.
Do I have to exchange my apartment building for another apartment building? No. The definition of “like-kind” is broad. An apartment building can be exchanged for an office building, vacant land, shopping center, etc. For the most part, any real property held for investment should qualify as “like kind.”
How much time do I have to identify replacement property? Investors have 45 calendar days after the closing of the relinquished property to identify replacement property.
What happens with the proceeds from the sale of the relinquished property? A qualified intermediary must be involved with the sale of the relinquished property and the purchase of the replacement property. The qualified intermediary must hold the proceeds until they are used to purchase the replacement property.
Where do I find a qualified intermediary? Many bank and title companies offer qualified intermediary services. We are happy to provide a list of companies in the Chicagoland area that provide qualified intermediary services.
How much time do I have to close on the replacement property? Investors must close by the earlier of (i) 180 calendar days after closing the sale of the relinquished property, or (ii) the due date for the investor’s tax return for the year the relinquished property was sold.
Can I purchase a replacement property before I close the sale of the property to be relinquished? Yes, as long as the statutory requirements are met, an investor can purchase the replacement property before selling the property to be relinquished. This process is referred to as a reverse 1031 Exchange.
Is there a limit on how many times you can do a 1031 Exchange? No.
When does the deferred tax liability come due? At the time an investor ultimately sells the replacement property with no corresponding 1031 Exchange.
This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
Wendy M. Reutebuch | Real Estate, Real Estate Finance and Creditors’ Rights
Wendy represents clients in both Illinois and Wisconsin in a wide variety of commercial real estate and real estate finance transactions. In addition to handling acquisitions, dispositions and leases, Wendy also advises lenders on loan transactions, loan workouts, loan restructurings, forbearance and pre-foreclosure matters. If you need assistance with a related matter, contact Wendy.