Basic Information

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By undertaking a 1031 exchange you can sell a current real estate investment and use more of the profits from that venture to carry out another.

While seemingly daunting at first, 1031 exchanges are relatively easy to understand. The goal of a 1031 exchange is to enable you to posses more money in the present and defer the taxes to a later date. This allows you to continue to invest this money instead of giving it to Uncle Sam. At some time the government will get their fair share, but in the meantime it can work for you.

In typical transactions, the government immediately taxes the profit gained by the property owner. The benefit of using a 1031 exchange is that the profit from selling your property is now deferred from taxation until a later date. 1031 exchanges are therefore used when you are selling one property and purchasing another. This replacement property should be of equal or greater value than the value of the relinquished property.

Since you are reinvesting the profits into another property, the economic benefits are not yet taken as a profit to be taxed, which is the governmental reasoning behind instituting the 1031 exchange

To pursue a 1031 exchange you must contact a Qualified Intermediary (QI), who will help you follow the process to complete an exchange. It is the job of the QI to hold onto your funds, make sure that IRS requirements are met, and he/she will deliver this asset to the closing agent of your replacement property. Without the services of a QI the IRS may not deem your transaction as a 1031 exchange.

There is a timeframe involved in claiming a 1031 exchange. Once the relinquished property is given up you have 45 days to identify a replacement property, and you may identify up to 3 properties. After the property is identified you have 180 days, or until the due date of the federal tax return for that year, whichever date comes first, to acquire the replacement property.

This is however, a tax-deferral and not a tax-free option. Upon the sale of your replacement property both the originally deferred gains in addition to your newly acquired profits are subjected to taxation.

We are happy to help you in with 1031 exchanges, but we also rely on the experts to help make sure this is a smooth and painless process. While contemplating benefits of 1031 exchanges we strongly encourage you to consult a tax official to discuss any unanswered questions or special circumstances, which may apply to you specifically.

Jon Wade  – Broker Owner  Colorado Group Realty, LLC
970-819-6930 or jon@mybrokers.com
509 Lincoln Ave Steamboat Springs, CO 80477