1031 Exchange

In a typical transaction, a property owner is taxed on the gain realized from the sale of their property. IRC Section 1031 provides an exception and allows you to postpone paying tax on the gain if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange. Gain deferred in a like-kind exchange under IRC Section 1031 is tax-deferred, but it is not tax-free.

A 1031 exchange, otherwise known as a tax-deferred exchange, is a method for selling one “qualified” property and then purchasing another “qualified” property within a specific time frame. While the process of selling and buying is similar to any standard sale and purchase, a 1031 exchange is unique because the entire transaction is treated by the Internal Revenue Service (“IRS”) as an exchange and not a sale.

Property owners working with a REIT may be able to combine the benefits of a 1031 Exchange and a 721 UPREIT. In this combined transaction, the property owner sells their investment property and ends up with an interest in a REIT. 

Consult a tax professional or refer to IRS publications for additional assistance with an IRC Section 1031/721 Transaction.

Process

1031 Flow Chart

Benefits 

  • Increased Buying Power: deferred taxes allow owners to invest more money in the replacement property

  • Diversification: provides a means to reallocate, consolidate or diversify your investment portfolio through the purchase of different qualified properties
  • Continue Income: provides a process to sell/exchange commercial properties, but still enjoy the benefit of regular income from income-producing real estate assets
  • Exit Strategy: provides an alternative process to sell/exchange commercial properties

  • Save Time: provides the opportunity to enjoy the benefits of professionally managed real estate
  • Defer Taxes: provides owners a process to defer taxes on capital gains and certain recapture taxes so long as the UPREIT holds the real property and the investor holds their interest in the REIT

 

What is a Qualified Intermediary?

•  A Qualified Intermediary (QI) is an independent party who facilitates tax-deferred exchanges pursuant to Section 1031 of the Internal Revenue Code. The QI cannot be the taxpayer.

•  Acting under a written agreement with the taxpayer, the QI acquires the relinquished property and transfers it to the buyer.

•  The QI holds the sales proceeds, to prevent the taxpayer from having actual or constructive receipt of the funds.

•  Finally, the QI acquires the replacement property and transfers it to the taxpayer to complete the exchange within the appropriate time limits.