Maybe you’re new to commercial real estate investing, and you’ve heard about something called a 1031 exchange. If you want to know what a 1031 exchange is, this guide can help you understand how a 1031 exchange works and what you can do to get started with this type of investment strategy.
What is a 1031 Exchange?
A 1031 exchange is a way for commercial real estate investors to avoid capital gains taxes. It involves selling an investment property and reinvesting the proceeds in a similar property or properties within a specific timeframe. Investors typically use this approach when focused on commercial properties like rental properties, restaurants, and office spaces.
1031 Exchange Explained
Any commercial property can be exchanged for what’s called a “like-kind” property, which is a property of equal or greater value. For instance, a retail location can be exchanged for an apartment complex as long as it is of equal or greater value.
Types of 1031 Exchanges
Sell one property and purchase a replacement property (or properties).
Sell a replacement property and current property at the same time.
Delayed reverse exchange
Purchase a replacement property before the sale of the current property.
Delayed build-to-suit exchange
Replace the current property with a new property that is built based on the investor’s needs.
Delayed/simultaneous build-to-suit exchange
Purchase a built-to-suit property before the sale of the current property.
Three Things to Remember with a 1031 Exchange
Replacement property must be of equal or greater value
Real estate investors need to find a replacement property – or properties – that are of equal or greater value to the property they are selling.
Identify a replacement property within 45 days
The IRS gives a 45-day window, which isn’t a lot of time. That’s why real estate investors need to plan ahead. Ideally, a replacement property is identified before the sale of the current property.
Purchase a replacement property within 180 days
Be aware that the IRS counts every day–not only business days–including weekends and holidays for the 180-day time frame.
The first step is to find an intermediary who can facilitate the 1031 exchange. Mattingly Ford can coordinate, arrange, and execute the proper paperwork to assert and complete your 1031 exchange. We also work with real estate teams to point investors to like-kind properties.
Mattingly Ford Title
The team at Mattingly Ford Title can prepare all the documentation needed for virtually any commercial transaction, including a 1031 exchange.