What is a 1031 Exchange

1031 Exchanges

A 1031 Exchange takes its name from Section 1031 of the Internal Revenue Code and allows a real property owner to either (i) directly exchange like-kind properties with another property owner, or (ii) sell property and then reinvest the proceeds in ownership of like-kind property. In each case, investors defer capital gains taxes. Further IRS guidance has facilitated the use of Tenant-in-Common structures for completing 1031 Exchanges.

A 1031 Exchange may be appropriate for investors who currently own real property (property that has been depreciated for tax purposes and/or has appreciated in fair market value) and will realize a net gain upon sale. In general, the relinquished property must have been used in the investor’s trade or business, or held for investment purposes.

Potential benefits/uses of a 1031 Exchange may include:

• deferring the payment of capital gains taxes to pursue personal income or investment goals
• upgrading or consolidating property
• diversifying and owning multiple properties
• owning institutional-grade properties with little management responsibility
• accounting for regional growth or income potential
• changing property types

1031 Exchanges are complex transactions and generally require the assistance of outside financial, legal and real estate professionals.