For people that either invest in commercial real estate, or are looking to invest in real estate in the future, purchasing real estate through a 1031 tax deferred exchange could be a great option. Under a 1031 exchange, a seller of a piece of real estate is able to defer their capital gains taxes if they use the sale proceeds to reinvest into a new piece of real estate. This can ultimately be a significant tax savings for those that take advantage of 1031 exchanges. There are five different forms of 1031 exchanges that all investors should be aware of.
The first type of 1031 exchange, which is also the original form, is the simultaneous exchange. Under this type of exchange, the sale of your original piece of real estate will take place at the exact same time that the purchase of your new real estate will take place. The entire transaction will take place in the same title office. While this is the most common and cleanest way to get it done, it can also be logistically challenging as it will require you to have the purchase and sale of the two real estate investments ready to close at the same time.
The most popular form of a 1031 exchange is the delayed exchange. Under the delayed exchange, you will have up to 180 calendar days to purchase the new piece of real estate after the original property has sold. This will help to alleviate many of the logistical challenges that come with the simultaneous exchange. Under the rules of the delayed exchange, the property that you want to buy must be identified within 45 days. If you either do not identify the property in time or close on it in time, you will be subject the required capital gains.
An improvement exchange is a type of 1031 exchange that allows you to build a new property. Under this form of a 1031 exchange, you may use the sale proceeds of the original property to either construct a new building or complete a major renovation of an existing one. This form of the 1031 exchange will require that you invest the entire portion of your equity in the new project and the construction must be completed within 180 days of the sale of the original property.
In some cases, a buyer may find that they want to purchase a new property, but do not yet have a property picked out to sell yet. With a reverse exchange, the buyer may close on the acquisition of the property first and then could spend time to consider what existing property they would like to sell. This will give the acquirer time to choose the asset that they want to sell and also find a buyer.
Personal Property Exchange
While most of the 1031 exchange tax code is dedicated to real estate, the personal property exchange can be used to buy and sell personal property in the same manner. Under the personal property exchange law, you will be able to use any gain on the sale of personal property to purchase a like-kind personal asset. For example, you can use the exchange to avoid any gain on sale of a boat if you use the sale proceeds to buy another boat.