As a commercial real estate investor, you should be familiar with all the tools necessary to be successful. One tool often overlooked is the 1031 or Tax Free Exchange. In a 1031 exchange, you can sell your investment property and not pay capital gains tax on the sale if you purchase a “like-kind” property within a certain period of time.
You can do a 1031 exchange in not only commercial real estate, but you can also exchange other “like” property such as selling a professional practice and purchasing another “like” professional practice tax free. Consult your local 1031 attorney to ensure your exchange qualifies as Tax Free.
Of course, the IRS, for job security purposes, has numerous rules to follow to make the exchange legal. Some of the main ones include:
– The replacement property must be of equal or greater value than the property being sold.
– Neither the property sold or the property purchased can be for personal use. It must be for investment purposes.
– You must declare a 1031 exchange when you are selling the commercial property.
– You have 45 calender days to identify a replacement commercial real estate.
– You have 180 days from the date you passed title to the property you sold to close on the replacement property you will
be purchasing.
– You must use a 1031 facilitator or intermediary to act as an independent third party. You cannot touch the proceeds from
the intial sale. Doing so may void the 1031 IRS rules and trigger a taxable event.
– The final rule is to check the 1031 rules or with your attorney prior to entering into a 1031 exchange. The IRS changes the
1031 rule quite often.
Use 1031 Exchanges to your advantage. Doing so will help save you thousands of dollars in Capital Gains tax.
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