- Productive Use or Investment – The 1031 exchange commercial properties must be kept for investment purposes or used in your business or trade. An investment property is referred to as the passive long-term holding of property, with the sole purpose of appreciation in value. It’s important to know that properties that do not qualify for a 1031 exchange include a personal residence, second home or vacation home, partnership interests, inventory property, notes or stock, bonds, stock-in-trade or different securities or pieces of evidence of indebtedness or interest.
- Like-kind exchange – For a property to be “like-kind,” the replacement property must be of a similar character or nature to the relinquished property and must be utilized for productive use in a business or trade or for investment purposes. For instance, like-kind exchanges can include a commercial office project for a ranch or farm, raw land for a hotel, and a shopping center for an office building.
- Exchange doesn’t always have to be “simultaneous” – An exchange can either be simultaneous, i.e., simultaneous swap or non-simultaneous like deferred or “Starker Tax Deferred Exchange.” In a non-simultaneous exchange, the taxpayer usually uses the services of a qualified intermediary or exchange facilitator who keeps the proceeds of the sale, makes all legal documents and carries out the transaction. It is therefore essential to identify the replacement property within 45 days from the date of the relinquished property’s sale. Similarly, the seller/commercial investor should obtain the replacement property within 180 days of the sale of the relinquished property. These time limitations are usually not extendable by the IRS.
- Title taken in the same name – The titles of the replacement property and the relinquished property must be the same. For instance, if there is LLC on the title of the relinquished property, it must also be on the title of the replacement property.
- Taxable “boot” and cost basis calculation – As a result of the 1031 exchange, the cost basis in your replacement property will always be the same as the property relinquished. Unless there is any money you received (i.e., “boot”), which may increase your recognized gain or decrease your recognized loss. The term “boot” means any other value obtained in the 1031 Exchange. You can simply avoid “boot” by never trading down. This is done by always acquiring replacement property of equal or higher value to the relinquished property, and that makes your 1031 exchange completely tax-free.
Individual tax situations can differ and can be quite complex. It is always advisable to seek guidance from a tax professional in a specific situation. If you are searching for 1031 exchange commercial properties, call 1031 Xchange at 888-993-2835 or drop an email: firstname.lastname@example.org