1031Exchanges and TIC Offerings explained from the perspective/bias of a Real Estate Broker.

Disclaimer –The following is not to be taken as legal advice. It is not to be taken as accounting advice. Consult your attorney and accountant before entering into any transaction involving the issues and investment vehicles described below.

 "No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like-kind which is to be held either for productive use in a trade or business or for investment.”

- Section 1031 of the Internal Revenue Service Code.

Capital Gains Taxes can not be avoided. The good news is that they can be deferred by effectively trading one investment property for another in what is referred to as a "like kind" exchange. An Internal Revenue Service Code 1031 exchange is a transaction in which a taxpayer is allowed to sell one property and buy another and defer the tax consequence, usually through delayed exchange, but sometimes with a simultaneous exchange, or reverse exchange. There are many technical details that need to be met in order for the Internal Revenue Service to recognize the sale and purchase as meeting the requirements to enjoy the tax benefits of Section 1031. Following are a few of the major requirements:

1.         The Seller can not receive any of the money from the transaction - or to the extent they do, that portion is subject to Capital Gains Tax. (The Seller would hire the Services of an "Accomodator" such as "DownStream Exchange" to comply with this requirement.) 

2.         The replacement property has to be "like kind" ie. an investment property for an investment property. A 4 unit rental property (held for investment) can't be sold and be replaced with a vacation house (purchased for personal use.)

3.         There are timing issues. Generally, up to three properties have to be identified as potential replacements within 45 days of the close of the Sale. One of those properties has to be purchased within 180 days of the Close.

4.         There has to be at least as much equity and at least as much debt in the replacement property as in the one that was sold.

5.         The intent has to be that the property is to be kept for "long term" investment.

If these requirements are met, the exchanger is able to put all of the equity acquired in the sale to work for them, rather than just a portion.

 

Who should contemplate a 1031 Exchange?

 Anyone who has investment property they would like to sell but wish to remain invested in real estate. Why give 18% to Uncle Sam and another 5% (California) to the State, if the intent is to purchase another investment property.  A 1031 exchange may be used to accomplish many investment goals of the Exchanger. Clients who wish to defer their capital gains tax, diversify, or consolidate their real estate holdings, increase the leverage on their investment, or even relocate their investment to another market, can achieve these goals using a 1031 exchange.

Sounds great, What's the Catch? 

With the current market conditions, it is very difficult to find/identify a suitable relpacement property within 45 days.

The Answer - Tenant in Common Ownership with

"The TIC Marketplace" ®