Updated: Jun 9, 2022
“Can you help us with a 1031 Exchange?” This is a question that comes up a lot in real estate closings, and it can mean 2 things- 1) can Lancaster Law Firm act as the qualified intermediary for a 1031 exchange or, 2) can Lancaster Law Firm conduct the closing on real estate if a 1031 exchange is involved? The answer to number 1 is no. If you need assistance finding a 1031 company to act as your qualified intermediary, please let us know and we will guide you in the right direction. The answer to number 2 is yes. At Lancaster Law Firm, we can assist you with your real estate closing involving a 1031 exchange, whether you are a buyer or seller.
Section 1031 of the Internal Revenue Code allows an investor to sell a property, reinvest the proceeds in a new like-kind property and defer all capital gain taxes. Generally, this process is referred to as a “1031 exchange,” and it is an option available that allows investors to defer capital gains tax, among other benefits. If a seller is going to participate in a 1031 exchange, the seller will direct his proceeds from the sale of real estate to be received by a qualified intermediary, and that qualified intermediary will hold the proceeds until they are used to purchase new like-kind property.
This money CANNOT touch the seller’s bank account. If it does, then you are disqualified from continuing the 1031 exchange. Here are a few other rules that you should be aware of if you are thinking about participating in a 1031 exchange:
The properties being sold and purchased as part of the 1031 exchange cannot be your primary residence – they need to be business or investment property. If you originally purchased the real estate as your primary residence but have since moved out, and you now have a new primary residence, the former property would be eligible for a 1031 exchange as business or investment property.
Once you sell your property, you have 45 days to find a “like-kind” replacement property, or properties. “Like-kind” has a very broad definition under the IRS. You can exchange an apartment building for raw land, or a ranch for a strip mall. It ultimately means that the exchange must be business or investment property for business or investment property. Once you have identified the replacement property, you must notify the 1031 company in writing.
The investor must complete the purchase of the replacement property within 180 days of the sale of the relinquished property. This time period starts concurrently with the 45-day rule, so you start counting 180 days once you close on the relinquished property.
The relinquished and replacement properties can be located anywhere in the USA.
There is no limit on how frequently or how many 1031 exchanges you can do. You can rollover the capital gains from one investment to another and you will only have to pay taxes once you eventually cash out.
If you are a seller, and this seems like a viable option for you, please contact a qualified intermediary before a real estate contract is executed, or right after. This will allow for a much more streamlined process, and it can avoid a surprise on the day before closing. A 1031 exchange is a great opportunity for a seller to make a savvy financial decision.
If you would like assistance on your real estate closing and a 1031 exchange is involved, please call 828-505-8514 or email firstname.lastname@example.org.
This is the general understanding of Lancaster Law Firm. Please contact a 1031 company or a tax professional for more detailed information.
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