You can avoid common obstacles in your own 1031 Exchange if you understand what Exchangers might encounter if proper planning and steps are not taken.
A lot of investors choose to structure their real estate transactions as a trust. According to section 1031 of the Internal Revenue Code, “a gain or loss shall not be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind that will be held for productive use in a trade or business or for investment.
There are many steps and hurdles that can appear on their way to a 1031 Exchange without realizing what they are in for. Generally, no gain or loss is recognized on an exchange of property solely for similar property that will be held for productive use in a business or trade or for investment under Section 1031 of the Internal Revenue Code. A property exchanged for like-kind property won’t result in a gain or loss if it is for productive use in a trade, business, or investment.
In this article, we will discuss some of the common challenges people deal with when it comes to taxes. As outlined in Section 1031 of the Internal Revenue Code, “When a property is exchanged for productive use in a trade or business or investment, no gain or loss is recognized unless it is exchanged solely for like-kind property for productive use in a trade or business or for investment.” By planning ahead, 1031 Exchanges can be avoided.
- Qualified intermediaries, as defined in section 1.1031(k)-1(g)(4)(iii), are those who facilitate 1031 exchanges with taxpayers through written agreements. By acquiring and transferring both relinquished and replacement properties, this intermediary facilitates property exchanges, but cannot be a taxpayer or a disqualified individual.
- Disqualified parties cannot be used as qualified intermediaries in a 1031 exchange, as defined in section 1.1031(k)-1(g)(4)(iii). Exchanges are facilitated by qualified intermediaries, separate from taxpayers or disqualified individuals. People who have held roles such as employee, attorney, accountant, etc., for taxpayers are disqualified. Using an attorney as a qualified intermediary, for example, disqualifies them from participating in the exchange.
- When it comes to 1031 exchanges, choosing the right ‘Qualified Intermediary’ is crucial. There are differences between them all. Find a Qualified Intermediary who is a member of the Federation of Exchange Accommodators (FEA). In light of the complexity of exchanges, you should choose firms with Certified Exchange Specialists® (CES®) and a legal team. Learn how to choose the right Qualified Intermediary.
- A Qualified Intermediary must facilitate your 1031 exchange before the property is sold. In order to prevent the taxpayer from gaining access to the funds, the exchange must be established before the first property closes. For a successful exchange, it is crucial to select the Qualified Intermediary well in advance of the closing date.
- An exchange occurs when the property is not properly documented when it is transferred to a Qualified Intermediary and received as replacement property from the Qualified Intermediary. Rather than a sale to one party followed by a purchase from another party, the transaction must be properly structured in order to comply with IRC Section 1031.
- An exchange occurs when the relinquished property is transferred to a Qualified Intermediary, and the replacement property is received from the Qualified Intermediary. Rather than selling to one party and buying from another, the transaction must be properly structured to comply with IRC Section 1031. Ineligible or disqualified property can be exchanged.
- Fix-and-flip properties, acquired for rapid resale after improvements, don’t qualify under Internal Revenue Code Section 1031. Unlike properties held for business or investment purposes, these ‘fix-and-flip’ properties are seen as inventory and not eligible for 1031 Exchange benefits.
