1031 Tax Exchange For Apartment Buildings
A 1031 exchange is an excellent way to defer capital gains taxes and reinvest your sale proceeds into a “like-kind” investment . Our understanding of the process, knowledge of our markets, and our relationships with qualified 1031 Exchange Accommodators allows us to serve your 1031 Exchange needs.
Please feel free to contact us at (310) 584-7721 to discuss in further detail.
1031 Exchange FAQ
Although 1031 Tax exchanges can become very complex in certain situations, for the purposes of this article I will keep the concept of 1031 exchange simple. But there are many instances where a specialized 1031 exchange attorney would be beneficial and necessary.
If you own a Investment property, Multi Family Apartment Building and you wish to sell it and buy another piece of property of equal or greater value, you can defer your capital gains taxes by performing a “like-kind” 1031 exchange, but must meet certain requirements.
Both properties must be held for either investment or business use. This can include rental properties like apartment buildings and homes. Land can be exchanged for a rental property. Agricultural real estate can even be exchanged for office buildings or apartments. Basically your apartment building can be exchanged for a like kind investment property.
To obtain a complete deferral of the income taxes, all of the profit made from the previous property must be re-invested in the new property, which must cost the same or more than the former property. Once the former property is sold, the investor generally has 180 days to close on a new investment property.
During the 180 days, a qualified intermediary must handle all of the assets involved and carefully organize the exchange.
The tricky and risky part is that you must specifically identify a replacement property that you plan on purchasing within 45 days of sale date on the original property.
And this is not an easy criteria to meet because the identified properties must be selected for purchase or else you lose eligibility for 1031 exchange.
For example if you select 3 properties in the 45 day period after escrow closes on the sale of your building then one of those 3 properties must be purchased or you lose your tax deferred status.
There is a 200% rule which allows you to select more than 3 properties. More on that later.
One advantage of the exchange is that, you may avoid paying capital gains taxes forever. If you keep the properties your entire life, upon your death your family may be allowed to sell the property, capital gains tax free (ask an attorney) .
The 3‑Property Rule allows you to identify up to three (3) properties regardless of their combined fair market value. You are not obligated to acquire all three properties but you must acquire at least one.
The 200% Rule allows you to identify four or more properties provided their combined fair market value does not exceed 200% (double) the fair market value of your relinquished property.
There are many types of exchanges but its beyond the scope of this article, when multiple partners, LLC’s, Corporations are involved I would highly suggest the advice of a 1031 exchange attorney, often these attorneys can advise you as part of the Intermediary process.
1031 Exchange Types:
To concurrently transfer ownership of both the relinquished property and the replacement property.
A property is sold and within 180 days, a replacement property is purchased. A 45 days for replacement property identification rules applies.
The replacement property is identified and purchased before the relinquished property is sold.
When the exchanger wishes to either make improvements to an identified replacement property, or construct a new replacement property.
What Does Not Qualify for a 1031 Exchange?
Personal property that does not qualify under IRS guidelines includes:
Stock in trade or other property held primarily for sale
Stocks, bonds or notes
Other securities or evidence of indebtedness or interest
Interest in a partnership
Certificates of trust or beneficial interests
Be aware I don’t give tax advice. For any specific questions about your tax situation please contact your tax advisor.
Do you have some questions about your property? Please contact me