Selling real estate ? Ask about 1031 exchange intermediary

This IRS tax rule can help owners save on capital gains taxes by reinvesting in their business.

Selling a building, real estate, or any other property related to a business is a big step for any business owner. While the tax implications of a massive asset sale may seem overwhelming, understanding Section 1031 of the Internal Revenue Code can help you save money and build your business—but only if you reinvest the proceeds appropriately. These questions and answers will help you learn more about how the 1031 exchange operates, what characteristics qualify, and who can help you navigate the process.

What is 1031 exchange?

Interchange 1031 is pretty straightforward. If the business owner owns property they currently own, they can sell that property, and if they reinvest the proceeds into an alternative property, there will be no immediate tax consequences for that particular transaction. They can defer any capital gains taxes associated with this sale.

This was previously applicable to other types of business assets, but recent changes to the tax code have limited its application to real estate assets. However, there are other limits as to the types of properties that qualify and the time frame required for the transaction.

What types of real estate are eligible?

To qualify as a 1031, both properties included in the exchange must be “of the same kind,” which means they must be of the same nature, character, or class as defined by the IRS.

Some key points to know:

  • Most of the properties are classified as of a similar type.
  • Property within the United States may only be exchanged with other property within the United States.
  • Property outside the United States may only be exchanged with other property outside the United States.

How does the process begin?

When you sell your existing investment property, you’ll want to work with a qualified intermediary (QI). A qualified broker may be a chartered accountant with 1031 experience, a real estate attorney, or a bank, such as Wells Fargo. Typically, prior to the sale of the first asset, its owner and qualified intermediary will enter into an exchange agreement whereby the QI is set to receive the funds from the sale and then holds and protects those funds throughout the transaction. A qualified broker can also consult with your employer on how to comply with the Internal Revenue Code.

When should the transaction be completed?

While the overall exchange process for each transaction may vary, there are specific deadlines that apply to any 1031 exchange. After a business asset is sold, the business owner must identify all potential replacement assets within 45 days. They then have up to 180 days from the date the original asset is sold (or until the tax return due date, whichever comes first) to complete the acquisition of the asset or replacement assets.

where do I start?

Finding a Qualified Intermediary (QI) is the first step in processing a successful 1031 exchange. Make sure you are working with a quality broker, such as a bank. There is no regulation on quality improvement, so using someone with experience and knowledge is important.

Also speak with a tax advisor who can help provide guidance on your particular transaction.


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