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1031 tax exchange 101
1031 exchanges are easy. Our quick flip 101 section provides an overview of the core topics. You will be ready to start finding 1031 exchange real estate, contacting 1031 exchange experts and reading investment articles in under 5 minutes.
What is a 1031 Exchange
A 1031 tax exchange is a method created by the IRS (IRC 1031) allowing real estate investors (business owners too) to defer ALL capital gains taxes on the sale of investment property by reinvesting sale proceeds into a replacement property.
1031 exchanges are also referred to as Starker exchanges, tax deferred exchanges, like kind property exchange, tax free exchange and delayed exchanges.
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Why 1031 Exchanges
Real estate investors build wealth more quickly when reinvesting sale proceeds using 1031 exchange procedures.
Similar in concept to a 401K/IRA, the 1031 tax deferred exchange provides a vehicle to earn compounding returns on deferred capital gains taxes.
A few other advantages include the ability to: control more property, refinance tax free equity optimizing leverage, effectively shelter state capital gains, and indefinitely defer capital gains tax.
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What is Like-Kind Property
We encounter a common misconception daily about what qualifies as like-kind property which is a main reason people inadvertently pay capital gains taxes.
The confusion arises because people are often told they must buy the same TYPE of property. That is, if they sold an investment house - they must exchange into another investment house. This is NOT the case.
ALL REAL ESTATE IS LIKE-KIND PROPERTY, as long as it is held for investment purposes.
Your options are open. For example, an investor may sell an investment house to exchange into an investment office building, and vice versa.
You may exercise your tax free exchange options to transfer investment proceeds into ANY type as long as the property is for investment USE. If you have questions, ask an independent 1031 exchange expert.
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1031 exchange rules
These chronological steps for the process are the starting rules to know for the procedure. Following these requirements is the majority of the process.
- Document 1031 exchange intent- include potential intent in contract language (an addendum can be added)
- Sell property - tax deferred exchange clock starts
- Proceeds from sale held in trust by unrelated 3rd party, 1031 exchange intermediary. Proceeds are never in your possession.
- 45 days from above close - identify suitable like kind replacement property(s)
- 180 days from above close - close on identified like kind replacement property(s)
As you begin searching for 1031 exchange real estate, to defer all capital gains taxes, it's a general requirement to replace debt and equity from your sale. A rule of thumb is to purchase real estate at least the same value of your sold property.
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Reverse 1031 exchanges
Often people find the perfect real estate, but have not sold their first property(s). Many individuals engage in a Reverse 1031 exchange, purchasing first and selling their properties within the 180 day timeframe.
The timeline is similar to above, except you buy 1st and sell within the 180 date period. Title to the purchased property is held by a 3rd party intermediary (aka. facilitator, accomodator) and transferred upon sale of your real estate.
Reverse 1031 exchange rules, requirements and costs differ. Connect with an independent 1031 exchange company and experts to review your options.
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What is NNN real estate
NNN real estate is a desired type of real estate for 1031 exchange investors largely because it offers an "out" from day to day management and because the property can be closed easily within the 45 day/180 day timeline.
NNN is the abbreviation for triple net lease (aka net lease & net net net lease), and offer investors no/low management real estate, high quality tenants and strong cash flow real estate opportunities.
Most of the real estate listed for sale here are NNN lease types in which the tenant handles all responsibility for the day to day management and all expenses associated with operating the property(taxes, insurance, maintenance).
Analogous in real estate to a bond, NNN leases tend to be long term, more secure and stable investments.
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Featured 1031 tax exchange NNN property
Road Ranger NNN
- $ 1,889,000
- 7.45% Cap
- NNN lease
Jacksonville - Island Foods
- $ 1,650,000
- 6.70% Cap
- NN lease
DaVita Dialysis
- $ 1,700,000
- 7.21% Cap
- NNN lease
Dollar General
- $ 840,000
- 7.2% Cap
- NN lease
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What is NNN TIC real estate
NNN TIC (Tenants-in-common) property is fractional ownership of NNN property (like a condo to the condominium building/1 piece of a larger pie).
The fractional buying structure of NNN TIC real estate offers the same No/Low management, high quality NNN properties except at a lower initial investment. Among the items 1031 exchange buyers enjoy are the expanded property offerings, especially, when sole real estate ownership options are beyond reach.
Because a 1031 exchange requirement is replacing the equity and debt of the sold property, most NNN TIC offerings allow for exact dollar matching making an ideal counterpart to whole property options.
Congratulations, you are ready to begin finding the perfect 1031 exchange property and meeting the 1031 exchange professional members and companies. To do extra independent research, visit the articles section to read up on more topics.
1031store is a free resource center helping investors find real estate, meet independent exchange professionals, and locate general information/resources to make your exchange easier and more profitable. We are a first stop to on the road to successfully completing your 1031 exchange.