What Are the Benefits of the 1031 Exchange?
In addition to deferring capital gain taxes, 1031 Exchanges provide the investor with a wide range of non-tax opportunities which can be custom selected for the investor's portfolio. These include:
- Repositioning of assets and/or consolidation or diversification.
- Increase leverage.
- Increase depreciation deduction.
- Reduce management obligations.
- Provide for estate and retirement planning.
- Improve cash flow
- Create or eliminate joint ownership
- Defer phantom gain on problem properties.
- Construct improvements on a property.
How Do the Mechanics of a 1031 Exchange Process Work?
Most 1031 Exchanges involve three parties:
- The Investor, or the exchanger
- The Buyer, who purchases the Investor's property
- The Seller, who sells the Investor a new/replacement property.
A profitable 1031 Exchange is arranged such that the "Safe Harbor" protections of the tax code are used, meaning the Investor and Buyer are not penalized by taxes. This requires a "Qualified Intermediary". This person becomes the fourth party in the exchange. The Qualified Intermediary ensures that all requirements are met so that taxes which are normally due in buying and selling transactions are avoided. The steps the Qualified Intermediary takes are:
- The Exchanger signs a contract to sell to the Buyer
- The Qualified Intermediary is retained to act for the Exchanger. This is typically
handled by the escrow although some investors choose an attorney to arrange
If you choose an attorney the costs go up significantly.
- Upon closing the Qualified Intermediary arranges the transfer of deed.
- A Replacement property purchased within 45 days or identified in writing. You
can identify up to three properties as possibles.
- The Exchanger has up to 180 days to purchase a replacement property.
- The Exchanger contracts with a Seller to purchase replacement property.
- Upon closing, The Qualified Intermediary assures transfer of deed from Seller
Rick Thornton has sixteen years experience helping investors through the 1031 process.