What is a 1031 Exchange?

A 1031 Exchange, also referred to as a like-kind exchange or tax-deferred exchange, allows investors to defer taxes on capital gains and depreciation recapture when selling real property. This tax benefit applies when the proceeds from the sale of real property—held for business or investment purposes—are reinvested into another similar property, also for business or investment use.

In a 1031 Exchange, the property being sold is known as the Relinquished Property, while the property purchased is the Replacement Property. For a 1031 Exchange to qualify, the properties involved must be like-kind, which typically means most real estate can be exchanged for other real estate. For example, an office building can be exchanged for a rental duplex, or a retail shopping center can be exchanged for farmland.

A key requirement of a 1031 Exchange is that neither the seller nor an agent can directly or indirectly access or control the proceeds from the sale. If the seller has access to these funds, the exchange is invalid. To ensure compliance, a Qualified Intermediary is used to hold the proceeds until they are transferred to the Replacement Property.

To participate in a 1031 Exchange, the taxpayer must be a U.S. taxpayer, which includes individuals, partnerships, S-corporations, C-corporations, LLCs, and trusts. Importantly, the same taxpayer who sells the Relinquished Property must also purchase the Replacement Property for the exchange to be valid.

The concept of 1031 Exchanges was first introduced by Congress in 1921 to encourage reinvestment in business assets. Over the years, the regulations surrounding 1031 Exchanges have evolved, with significant changes to real estate transactions in 2001.

At 1031 Asset Solutions we can help simply your transaction and make sure every requirement is met. Reach out to us today at 844-401-1031.