1031 Exchanges
As experienced 1031 Exchange Specialists, the Moret Properties team is more than happy to answer any questions you may have about conducting a 1031 exchange and offers expert 1031 exchange brokerage services and consulting.
What is a 1031 Exchange?
Named after Section 1031 of the U.S. Internal Revenue Code, a 1031 exchange is a popular option for savvy real estate investors looking to defer paying steep capital gains taxes on the sale of an income property. This provision allows investment property owners to defer federal capital gains taxes by using money from the sale of one investment property to purchase another “like-kind” property.
How Does a 1031 Exchange Work?
In order to qualify for tax deferments on this type of exchange, Section 1031 outlines certain criteria that must be met with regards to the type of property being acquired, the timeline of the property ownership transfers, and the flow of funds from the initial sale. Here are the main takeaways you should know:
• Both properties must qualify as like-kind (see below)
• A like-kind property to be acquired must be identified within 45 days
• The like-kind property must be acquired within 180 days
• All proceeds from the initial sale must be deposited into the account of a qualified intermediary unrelated to the seller
• If the proceeds from the initial property sale are greater than the purchase price of the newly acquired property, the difference ( known as ‘boot’) is subject to capital gains taxes
What Kind of Properties Qualify for 1031 Exchanges?
Acquired properties qualify for this tax code provision if they are considered to be like-kind. Section 1031 of the Internal Revenue Code broadly defines like-kind as real estate property held for productive use such as trade, business, or investment purposes ( as opposed to property primarily used for personal use, such as a residence) so long as it is the “same in nature, character, or class”. This means that many types of income properties and other real estate investments qualify for 1031 exchanges, including:
Apartments
Being income-generating real estate property, apartment buildings are a popular 1031 exchange option. As experienced brokers of multi-family apartment buildings in the Westside and Mid-City areas of Los Angeles, we can assist with the acquisition of apartment buildings for 1031 exchanges.
Retail
Similarly, commercial properties, including those used for retail, can also qualify for 1031 exchanges. With over 15 years of experience in the commercial real estate space, we’ve brokered dozens of commercial real estate transactions— including retail property 1031 exchanges both in and out of California.
Single-Tenant-Triple-Net Properties
A great 1031 exchange option for real estate investors who’d prefer not to be bothered with the expenses and headaches that so often come with property management, a single-tenant-triple-net refers to a lease structure where an entire property is leased to a sole tenant who assumes responsibility for all property-related expenses. While an all-expenses-excluded lease typically offers the tenant a somewhat lower monthly rental rate, the trade-off is well worth it to many investors.
Delaware Statutory Trust
Another 1031 exchange option that is suited to real estate investors looking for a more ‘hands off’ investment for generating passive income, a Delaware Statutory Trust (DST) is an independent legal entity formed under the laws of the state of Delaware to hold title to one or multiple commercial income properties. By using the proceeds from the sale of your current income property, you can take advantage of the capital gains tax deferments of a 1031 Exchange and invest in a DST holding that pays monthly disbursements while freeing you of the responsibilities of property ownership.
Interested in Doing a 1031 Exchange?
Contact Keith to learn more about 1031 exchanges and 1031 consulting services