1031 EXCHANGE 101
A 1031 exchange, named after section 1031 of the U.S. Internal Revenue Code, is a way to postpone capital gains tax on the sale of a business or investment property by using the proceeds to buy a similar (“like-kind”) property.
A 1031 exchange can be complex, so you’ll likely want to consult with a qualified tax pro. You can read the rules and details in IRS Publication 544, but here are some basics about how a 1031 exchange works and the steps involved.
Step 1. identify the property you want to sell. A 131 exchange is generally only for business or investment properties. Property for personal use – like your primary residence or a vacation home – typically doesn’t count.
Step 2. Identify the property you want to buy. The property you’re selling and the property you’re buying have to be “like-kind”, which means they’re of the same nature, character or class, but not necessarily the same quality or grade (more on that below). Note that property inside the U.S. isn’t considered like-kind to property outside the U.S.
Step 3. Choose a qualified intermediary. If you don’t receive cash prematurely is to work with a qualified intermediary, sometimes is called an exchange facilitator. Basically, they hold the funds in escrow for you until the exchange is complete (assuming the sale and the purchase don’t take place simultaneously). Choose carefully. If they go bankrupt or flake on you, you could lose money. You could also miss key deadlines and end up paying taxes now rather than later.
Step 4. Decide how much of the sale proceeds will go towards the new property. You don’t have to reinvest all of the sale proceeds in a like-kind property. Generally, you can defer capital gains tax only on the portion you reinvest. So if you keep some of the proceeds, you might end up paying some capital gains tax now.
Step 5. Keep an eye on the calendar. For the most part, you have to meet two deadlines or the gain on the sale of your property may be taxable. First, you have 45 days from the date you sell your property to identify potential replacement properties. You have to do that in writing and share it with the seller or your qualified intermediary.
Step 6. Be careful about where the money is. Remember, the whole idea behind a 1031 exchange is that if you didn’t receive any proceeds from the sale, there’s no income to tax. So, taking control of the cash or other proceeds before the exchange is done may disqualify the deal and make your gain immediately taxable.
Step 7. Tell the IRS about your transaction. You’ll likely need to file IRS Form 8824 with your tax return. That form is where you describe the properties, provide a timeline, explain who was involved and detail the money involved.
- Farm Land
- Rental Homes, Condos, & Apartments
- Water, Air or Mineral Rights
- Oil $ Gas Interests
- Industrial Properties
- Retail Properties
- Tenants in Common (TIC) Investment Interest
- DST Interest
- Raw Land
- You still have to pay tax, just later. A 1031 exchange doesn’t make capital gains tax go away, it just postpones it. A capital gains tax bill will come due at some point, so prepare for that.
- Not everything is eligible. A key rule about 1031 exchanges is that they’re generally only for business or investment properties. Property for personal use like your home or a vacation house typically doesn’t count.
- The properties don’t have to be similar as you think. You don’t necessarily have to swap a rental property for an identical rental property or a parking lot for a parking lot. “lie-kind” generally means you’re swapping one investment property for another investment property. It might be possible to exchange vacant land for a commercial building, for example.
- You’re not limited to buildings or land. Real estate isn’t the only kind of property eligible for 1031 exchanges. “Personal property,” which includes items such as cars or trucks, may be eligible. You just can’t exchange real property for personal property.
- Relationships matter. Your qualified intermediary or exchange facilitator can’t be a relative, your attorney, banker, employee, accountant or real estate agent.
1031 exchanges can invest in real property anywhere in the United States if the property sold is domestic property or internationally (if the property sold is international property). Whereas Opportunity Zone fund investments are limited to the Opportunity Zones designated 8700 census tracts. 1031 exchanges file a single IRS Form 8824 for the year of the sale of their property. While Opportunity Zone fund investment managers must report annually through IRS.
Like-kind properties in the Virgin Islands, Guam, or the Northern Mariana Islands ay count as like-kind. Foreign real property in the other eleven US Territories (including Puerto Rico) is not considered like-kind to domestic American real estate. Since there are no special provisions made for these other US Territories, they fall under the general rule given in 1031 (h). Real property located in the United States and real property located outside the United States are not property of a like-kind.
Opportunity Zone programs provide three tax benefits to investors who invest capital gains into a Qualified Opportunity Zone und (QOZF) or Qualified Opportunity Zone Businesses within 180 days of the sale or exchange giving rise to such gains.
1. 45 Day Identification Period – upon asset sale one has 45 days to source & declare new like-kind asset
2. The 180-Day purchase period
3. Must be a like-kind exchange of equal or greater asset value*
4. Cannot touch sale proceeds
5. Must invest 100% of principal cost basis and gain into new asset
6. 1031 exchange deferral is perpetual until the titleholder dies or decides to sell off assets without continued deferral resulting in payment due of all past deferred taxes
7. In the example of real estate any depreciation recapture will become due as well
8. Like-kind property is for productive use in a trade of business only
9. Same exchanger, the person who must also buy new asset
10. The IRS requires the use of a qualified intermediary or accommodator to oversee the exchange, prepare the exchange documents, and ensure that the exchange is in compliance with IRS rules
AN ALTERNATIVE TO TRADITIONAL 1031 EXCHANGES. ELIMINATING THE LIMITATIONS,
THE TAXES, AND REGAINING FINANCIAL CONTROL OF YOUR MONEY
- Elimination of Like-kind provision. Allows investors to jump asset classes from any asset into our fund.
- Separation of principal cost basis and gain. Allows you to keep your principal to redeploy into another asset tax free while deferring the capital gain tax owed.
- Elimination of equal or greater value exchange
- Transaction transparency of funds invested
- Relieves you of all forms of administration or management responsibilities and expenses.
- Eliminates personal liability
1031 Exchanges are a very complex transaction, and
professional help is always needed to do it correctly.
Our Veracor Team is here to help
3 SIMPLE STEPS
Submit your contact information and investment details below.
2. VERACOR INTERNAL REVIEW
Based upon your investor criteria, the Veracor Management Team will perform an internal vetting process.
3. VERACOR MANAGEMENT WILL CONTACT YOU TO ARRANGE FUND PLACEMENT
A member of the Veracor Management Team will personally reach out to qualified investment candidates to discuss
specific details and next steps.