A 1031 exchange lets an investor sell investment real estate and buy replacement real estate while deferring capital gains tax. It is one of the most useful tools for apartment and commercial owners, and also one of the easiest to get wrong. Here is how it works.
Since the 2017 tax law changes, Section 1031 applies only to real property held for business or investment. An apartment building can be exchanged for a retail center, industrial building or land, as long as both are held for investment or business use. Your primary residence does not qualify.
These deadlines are strict. Start looking at replacement properties before you list your current one.
You cannot receive the sale proceeds yourself. A qualified intermediary holds the funds from your sale and uses them to buy the replacement property. Choose your intermediary before you close the sale.
If you take cash out of the exchange, that portion is generally taxable. To defer all of the gain, investors typically buy replacement property of equal or greater value and reinvest all of the proceeds.
The exchange is reported to the IRS on Form 8824. Keep your exchange documents with your property records, since they establish your basis for the future.
PIVOT represents investors on both sides of the exchange: selling the current property and finding replacement property that fits the timeline. We coordinate with your qualified intermediary and your CPA so the deadlines do not sneak up on you. Learn more on our Multifamily & 1031 Exchanges page or contact us.
This article is general information, not tax or legal advice. Confirm your exchange plan with your CPA or tax attorney.