A 1031 exchange is it refers to the IRS
code. It’s 1031 um in the IRS code which
refers to investment property or
business property and it allows someone
who has investment or business property
to defer a capital gain event by doing a
like kind exchange. However, it has
really strict deadlines and really
strict like kind exchange language that
has to be complied with. When we look at
doing a 1031 exchange, we want to make
sure before the sale date because after
the sale date, you have 45 days from
that sale date to choose a replacement
property. Then you have 180 days after
that sale date to then close on that new
property. And all the while, you aren’t
allowed to touch the money. If you touch
the money, you’ve invalidated that
transfer. So you have to work with a
qualified intermediary to make sure that
that money goes from the first
transaction to the like kind exchange
directly without touching your hands.
That’s how the 1031 generally works. A
1031 can be very important and well used
in estate planning purposes because a
1031 defers that capital gain event um
which upon the passing of that of that
owner the 1031 uh allows that deferment
of capital gain and then the new owner
to take the step up in basis which
essentially would eliminate the capital
gain all potentially altogether at that
point. Other things that we can utilize
for 1031 is just for growth. um it as
long as the property grows, your capital
gain, your potential capital gain is
going to grow. So if we’re deferring
that and growing it into larger, better
properties, we can kind of kick that
down the road. Now, one of the things we
need to pay attention to are those
deadlines. They’re very strict as well
as the like kind exchange. It’s an
applesto apples transaction. We can’t do
apples to oranges. So, you really should
utilize a professional in trying to
figure out what is an apple to apple
versus what is an apple to an orange.
Also, we can’t use this for residential
purposes. There’s a whole different
statutes for that, but not for 1031.
Again, this is just business or
investment property. And after the sale
occurs, there are other investment
vehicles that can be utilized, but not a
1031 unless you have already put in
place that 1031 transaction with a
qualified intermediary and that closing
has not the money has not been
transferred to you. Now, one of the
other caveats with a 1031 exchange is
maybe you find a property that doesn’t
fill out that entire like kind exchange
property u that you wanted to replace.
said, say it’s a lesser value or you
could only find one versus a couple of
similar like values. Well, any money
that does touch your hand would then
becomes taxable at capital gains. It’s
called the boot. So, we want to make
sure we avoid the boot. We want to make
sure that we’re sticking to deadlines
and we’re make sure we’re picking like
kind appletole transactions.