1031 Exchange Rules 360 | 1031 Exchange And Tenancy In Common

1031 Exchange Explained

Internal Revenue Code provides that no gain or loss shall be recognized on the exchange of commercial real estate is held for productive use in a trade or business, or for investment. A tax-deferred exchange is a method by which a real estate retirees trades one or more relinquished commercial real estate for one or more replacement commercial real estate of like-kind. Such an exchange allows the issuer to defer the payment of federal income taxes and some state taxes on the transaction.

The theory behind internal revenue code is to allow the real estate retirees to reinvest the sale proceeds into another commercial real estate, foregoing any economic gains that may have been realized from the sale. If you have recently sold, or are thinking of selling commercial real estate, we can assist in matching you with a qualified 1031 advisor. A 1031 advisor can help you explore your 1031 exchange options. Contact us today for a free consultation.

1031 Exchange Rules

1031 Identification Rules

All 1031 exchanges must comply with one of the following rules:

The Three-Commercial Real Estate Rule - exchangers must identify up to, but no more than three potential replacement commercial real estate during the acquisition period.

The 200% Rule - Stipulates that the aggregate value of all replacement commercial real estate in the exchange must not exceed 200% of the value of the relinquished commercial real estate at the time of sale.

The 95% Exception - Finally, the 95% rule stipulates that the aggregate value of all like kind replacement commercial real estate must account for at least 95% of the value of the relinquished commercial real estate at the time of sale in order for the exchange to qualify. This rule applies only if rules 1 and 2 are invalid.

Contact us for a free consultation with a 1031 advisor.

1031 Exchange Requirement

First 1031 Exchange Requirement: exchanger Must Reinvest 100% of Proceeds: All cash or other proceeds received from the sale of the relinquished commercial real estate must be used to acquire the replacement commercial real estate.

Second Requirement: The amount of equity held in the relinquished commercial real estate must be less than or equal to the amount of equity held in the replacement commercial real estate. This is to insure no overextension of the assets by the real estate retiree.

Third, each real estate retiree must use a Qualified Intermediary (QI) to oversee the transaction. A QI is a qualified individual that prepares the paperwork, holds all proceeds from the transaction, and provides any technical advise on the exchange process.

Finally, all 1031 exchanges require the exchange of like kind commercial real estate for other like kind property. A definition of such may be found in internal revenue code.

For more information on 1031 exchanges or tenancy in common exchanges, or to be put in contact with a licensed 1031 advisor, contact us today!

Find A 1031 Advisor

Very often 1031 exchanges can be riddled with a myriad of potential tax and legal pitfalls. For this reason, it is strongly suggested that each real estate retiree elect a licensed 1031 advisor to oversee their transaction. This 1031 advisor (read registered representative) will be able to facilitate the exchange in a timely manner while watching out for the real estate retiree’s best interests and investment objectives.

A 1031 advisor will work with you throughout the exchange process to do all of the following:

1. Develop your investment strategy
2. Determine viable like kind replacement commercial real estate for the exchange
3. Answer any questions you may have regarding the exchange process
4. Manage the exchange from start to finish