Understanding a 1031 exchange

| Feb 9, 2021 | Uncategorized |

There are all kinds of things the government does to incentivize investment and job growth. Section 179 of the IRS tax code allows people to deduct money used for business equipment, for example. Section 1031 makes it possible for California investors to limit their liability for capital gains taxes. This mechanism is commonly called a 1031 exchange in the commercial real estate world. Other people know it as a like-kind exchange.

How a like-kind exchange works

Like-kind exchanges make it possible for investors to limit their tax liability when they move from one asset directly to another. For example, a real estate investor could sell one office building and realize gains of several thousand dollars. Purchasing another building worth the same amount, or more, reduces the investor’s tax liabilities.

There are some restrictions when it comes to like-kind exchanges. The assets exchanged need to be similar. For example, it could be possible to exchange one office building for another. The buildings must be valued on their own merits; artwork and furnishings are not counted in the valuation.

Both real estate properties that are transacted in the exchange must be in the United States. International investments can’t be counted towards a like-kind exchange. The exchange transaction also needs to take place within 180 days of the initial sale. Investors must act quickly and keep their eyes on the marketplace to take advantage of the 1031 exchange.

Professional help for real estate transactions

U.S. tax law is complicated, so the best way to navigate a like-kind exchange is with help from professionals. In this case, that means consulting a licensed real estate broker, a lawyer and an accountant. Together, these professionals may help you maximize your financial gains while still minimizing your tax liability.