1031 Exchanges allow you as an investment owner to diversify your real estate portfolio, exchange into a property closer to your primary residence, build generational wealth, and more. Consult with one of our 1031 exchange San Diego experts to get started.
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1. Both the Relinquished and the Replacement Properties must be held by the Exchanger either for investment purposes or for productive use in a trade or business.
The Exchanger's purpose and intent in holding the property is the critical test. The use of the property by other parties to the exchange (Relinquished Property buyer or Replacement Property seller) is irrelevant.
2. The Relinquished and the Replacement Properties must also be "like-kind." The term "like-kind" refers to the nature or character of the property, ignoring differences of grade or quality. For example, unimproved real
property is considered like-kind to improved real property, because the lack of improvements is a distinction of grade or quality; the basic real estate nature of both parcels is the same. Treas. Reg. S1.1031 (a)-1(b). In essence, virtually all real property in the United States that is held for investment or productive use in a trade or business ("1031 qualified use") is "like-kind" to all other US real property to be held for a 1031 qualified use.
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Since 1921, Federal tax law under Internal Revenue Code (IRC) section 1031 has permitted a taxpayer to exchange business-use or investment assets for other like-kind business use or investment assets without recognizing taxable gain on the sale of the old assets. The taxes, which otherwise would have been due from the sale, are thus deferred. Most 1031 Exchanges involve separate buyers and sellers and are not simple swaps between two parties. Under these circumstances, the use of an independent third party Qualified Intermediary (QI) is necessary to satisfy the “exchange” requirement. The QI holds the sale proceeds for the benefit of the taxpayer during the exchange, disbursing funds for purchase of like-kind replacement property, and returning any unused funds to the taxpayer at the end of the exchange. 1031 Exchanges must be completed within 180 days. Taxpayers recognize gain and pay tax on any unused funds or when they ultimately “cash out” of their property. In 2018, section 1031 was amended to provide that only real estate is eligible for a 1031 Exchange.
Like Kind Exchanges, also known as tax-deferred exchanges, are defined by IRC section 1031. Since 1921, section 1031 has permitted a taxpayer to exchange business-use or investment assets for other like-kind business use or investment assets without recognizing taxable gain on the sale of the old assets. The taxes which otherwise would have been due from the sale are thus deferred. Section 1031 transactions range from 2-party “swaps” to more complex non-simultaneous 1031 Exchanges involving separate buyers and sellers. Qualifying assets include commercial, agricultural and rental real estate. Tax rules for non-simultaneous exchanges require the use of an independent third party Qualified Intermediary (QI). The QI holds the sale proceeds for the benefit of the taxpayer during the exchange, disbursing funds for purchase of like-kind replacement property, and returning any unused funds to the taxpayer at the end of the exchange. Section 1031 Exchanges must be completed within 180 days. Taxpayers recognize gain and pay tax on any unused funds or when they ultimately “cash out” of their property.
All businesses, manufacturers, real estate investors, companies in the construction, trucking, rail, marine and equipment leasing industries, farmers, ranchers, individuals and more make good use of like-kind exchanges. 1031 Like-Kind Exchanges are one of the few incentives available to and used by taxpayers of all sizes. A recent industry survey showed that 60% of exchanges involve properties worth less than $1 million, and more than a third are worth less than $500,000. Qualified Intermediaries (QI) facilitate non-simultaneous tax-deferred exchanges of investment and business use properties for taxpayers of all sizes, from individuals of modest means to high net worth taxpayers and from small businesses to large entities.
Following a like-kind exchange, the owner of business use or investment real estate (“investor”) has more capital to acquire replacement real estate. This may result in increasing cash flow and/or increasing appreciation potential of the asset. In addition, the economy benefits because the investor cannot receive full tax deferral without fully reinvesting into the replacement property. The transactions generate taxable income in the form of title and escrow fees, real estate commissions, legal fees, and accounting fees as well as the purchase of goods and services if the replacement property is being improved. Local and state governments also benefit from fees and taxes which are generated by the real estate transactions. Since real estate located in foreign countries are not like-kind to real estate in the United States, section 1031 promotes reinvestment and job growth within our US borders.
When selecting a Qualified Intermediary, the Exchanger must feel confident that their Qualified Intermediary is a professional company with the competence and commitment to provide high quality service and security for exchange funds. Through our national network of offices, IPX1031 has developed a reputation as the industry leader in IRC §1031 Qualified Intermediary services.
Safety and security of exchange funds is a matter of paramount importance. IPX1031 routinely provides customers with the following superior safety and security controls for exchange funds:
Expertise & Service
Our depth of technical expertise and practical experience has developed over many years. Additionally, our professionalism and commitment to our customers are demonstrated every day by the following.
IPX1031 is a wholly owned subsidiary of Fidelity National Financial, Inc. (NYSE:FNF) which is a leading provider of title insurance, mortgage services and diversified services. FNF is the nation’s largest title insurance company through its title insurance underwriters – Fidelity National Title, Chicago Title, Commonwealth Land Title, Ticor Title, Alamo Title and National Title of New York – that collectively issue more title insurance policies than any other title company in the United States.
Relinquished Property Sale Contract:
“Notwithstanding anything to the contrary, Buyer hereby acknowledges that it is the intent of Seller to effect an IRC §1031 tax deferred exchange, which will not delay the closing or cause additional expense to Buyer. Seller’s rights under this agreement may be assigned to Investment Property Exchange Services, Inc. (IPX1031), as Qualified Intermediary, for the purpose of completing such an exchange. Buyer agrees to cooperate with Seller and IPX1031 in a manner necessary to complete the exchange.”
“Notwithstanding anything to the contrary, Seller hereby acknowledges that it is the intent of Buyer to effect an IRC §1031 tax deferred exchange, which will not delay the closing or cause additional expense to Seller. Buyer’s rights under this agreement may be assigned to Investment Property Exchange Services, Inc. (IPX1031), as Qualified Intermediary, for the purpose of completing such an exchange. Seller agrees to cooperate with Buyer and IPX1031 in a manner necessary to complete the exchange.”
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Like-kind exchanges contribute to the velocity of the economy and promote job growth within the United States. §1031 stimulates the economy by encouraging real estate transactions. Transactional activity results in taxable income, job growth, manufacturing, financial services, construction, improved neighborhoods and tax revenue to states and local communities. Ultimately, this economic stimulus spills over to create jobs in factories, restaurants, recreational, hospitality, tourism and other local small businesses that generate revenue from the after tax dollars of employed workers.
Section 1031 is used to promote conservation and environmental policies. Grants of conservation easements can be structured as tax-deferred exchanges, facilitating government and privately funded programs designed to improve water quality, reduce soil erosion, maintain wetlands and sustain critical wildlife habitat. These exchanges also enable landowners to acquire replacement farm or ranchland in less environmentally sensitive locations.
Our unique service always starts with a tiered, four level system, which then allows us to have an open conversation and action plan with the Seller regarding what Sales Strategy we offer, best suits their situation, and the property.