The Internal Revenue Code of 1921 provided the deferred exchange of IRC Section 1031 and currently remains one of the last IRS-provided tax deferral vehicles.

The bottom line for any investor/taxpayer who does a 1031 exchange is that they can sell their existing property and buy another without a tax event. If structured properly, following IRS guidelines will allow the investor/taxpayer to use 100 percent of the proceeds from the sale of his existing property to purchase the new property, thereby avoiding any capital gain taxes.

What is involved in doing an IRC Section 1031 like-kind exchange?
• You find a buyer for your existing property. In the sales contract, include language stating your intention to do a 1031 exchange.
• At the closing of your existing property, your sales proceeds go to a “qualified intermediary” to be invested in a money market account.
• You have 45 days from your closing to identify your new property(s) for purchase. (You can identify up to three properties for replacement without regard to fair market value. However, in most instances if you decide to identify more than three properties the fair market value cannot exceed 200 percent of the fair market value of your old property.)
• Within 180 days from closing of your relinquished property, or the due date of your tax return for the year in which the transfer of your relinquished property sold, the closing of your new property must happen.
• Settlement happens and title conveys to buying entity.

1031 Dos and Don’ts
DO use professionals to help with your exchange. Consult a CPA, attorney, real estate professional, lender and qualified intermediary.

DO NOT be misled by the fact that you have 45 days to find a replacement property. You would be shocked by how quickly 45 days passes, leading you to rush your buying process.

DO sell your existing property before doing a 1031 exchange. You can buy your new property first by doing a “reverse exchange,” but it is more costly and time consuming.

DO NOT try to save money or time by using your existing CPA, attorney or lender to hold your sales proceeds. The IRC Section 1031 requires that a qualified intermediary be used to successfully complete your exchange.

Benefits to Investor
• Increased cash flow by deferring payment of capital gains taxes for added purchasing power.
• Ability to transfer multi-tenant properties or non-income-producing properties to single-tenant, income-producing assets.
• Less landlord responsibility by investing in single-tenant, net-leased properties.

Jonathan W. Hipp is senior vice president - net lease investments with Grubb & Ellis Company.


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