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What is a 1031 Exchange?
Defer taxes when buying and selling commercial or investment real estate
Generally, the sale of a real property, such as an office building, rental house, apartment building or strip mall, is a taxable event which creates a tax liability to the seller. However, Section 1031 of the Internal Revenue Code allows for taxes to be deferred for a qualifying exchange of like-kind property, in which you buy one piece of real estate to replace another.
If you’re selling a business or investment real estate property and buying another, Section 1031 may enable you to defer capital gains and other tax liability on the transaction. But it’s crucial that the transaction be structured as an exchange that complies with “safe harbor” IRS regulations that apply to Section 1031 exchanges. Just remember: an exchange is eligible for tax deferral; a sale followed by a purchase is not.
The “Like-Kind” Requirement
One of the criteria for qualification under Section 1031 is that the two properties involved in the transaction must be “of like kind.” Thankfully, in the case of real estate, the “like-kind” requirement is very easy to satisfy — typically, any business or investment real property may be exchanged for any other.
Increased Purchasing Power
Using a Section 1031 exchange enables the seller to reinvest the cash from the sale that would otherwise be paid to the IRS into more or better property.
To demonstrate this, here’s a simple example assuming an individual taxpayer with a $2 million sale, a $1,200,000 gain, 5% closing costs, no indebtedness encumbering the property, and a 23.8% total effective tax rate*:
Learn More About NES Financial’s 1031 Exchange Services
Interested in finding out more about 1031 exchanges? One of the key elements of the IRS 1031 regulations is the use of a qualified intermediary (QI) to facilitate the exchange. One of the most important steps towards a successful exchange is selecting the right QI.
At NES Financial, we’ve put together an industry-leading track record of 1031 success, with tens of thousands of transactions and more than 25 years in the business. Our General Counsel developed significant IRC 1031 guidance while at the IRS National Office. And we’ve built a cutting-edge administration platform, called eSTAC®, from the ground up to maximize transaction security, transparency, and compliance.
If you’re considering a real estate exchange, please don’t hesitate to contact us, for a free consultation, by filling out the form below.