Internal Revenue Code Section 1031 allows you and your clients the ability to defer capital gain taxes when disposing of essentially any property “held for investment.” When properly structured, IRC Section 1031 allows an investor to sell a property, reinvest the proceeds in a new property and defer all capital gains taxes. IRC Section 1031 (a)(1) states:

“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 for productive use in a trade or business or for investment.”

1. Always discuss a §1031 Tax Deferred Exchange with your tax and/or legal advisors.

2. Call an Exchange Intermediary for a consultation before closing on the relinquished property.

3. Include verbiage in the Purchase and Sale Agreement establishing the intent to affect a §1031 Tax Deferred Exchange. Examples are as follows:

"Buyer is aware that Seller intends to perform an IRC §1031 Tax Deferred Exchange. Seller requests Buyer's Cooperation with Seller and Exchange Intermediary, at no additional cost or liability to Buyer, by executing the documents necessary to complete Seller's IRC Section 1031 Tax Deferred Exchange transaction. Seller agrees to hold Buyer harmless from any and all claims, liabilities, costs, or delays in time resulting from such an exchange."

"Seller is aware that Buyer intends to perform an IRC §1031 Tax Deferred Exchange. Buyer requests Seller's cooperation with Buyer and Exchange Intermediary, at no additional cost or liability to Seller, by executing the documents necessary to complete Buyer's IRC Section 1031 Tax Deferred Exchange transaction . Buyer agrees to hold Seller harmless from any and all claims, liabilities, costs, or delays in time resulting from such an exchange.”

1. Both the “relinquished” and “replacement” properties must be either used in a business or held for investment purposes. “Like-kind” is the term the IRS uses to describe the type of properties that qualify. Any property held for investment can be exchanged for any other “like-kind” property held for investment.

2. The IRS requires an investor to identify the replacement property(s) within 45 days from closing on the sale of a relinquished property. The 45-Day Identification Period begins on the closing date, and the replacement property(s) must be properly identified in a letter signed by the Exchanger and received by the Qualified Intermediary.

3. Close on the replacement property by the earliest of either: 180 calendar days after closing on the sale of the relinquished property or the due date for filing the tax return for the year in which the relinquished property was sold, whichever is earlier (unless an extension has been filed).

To fully defer all capital gain taxes, an Exchanger must (1) buy a property or properties of equal or greater value (net of closing costs); and (2) reinvest all net proceeds from the sale of the relinquished property. If all exchange proceeds from the sale of the relinquished property are not reinvested, the balance received is considered “cash boot,” and capital gains tax may be recognized on that amount. If a replacement property with an equal or greater amount of debt is not acquired within the applicable time frame, the Exchanger is relieved of a debt obligation and this is considered “mortgage boot.” This reduction in debt is considered by the IRS to be a benefit to the Exchanger and is therefore a taxable event, unless, it is offset by adding equivalent cash to the replacement property purchase.

Milestone Title, LLC does not provide tax or legal advice. Investors should always seek the advice of their tax and/or legal advisors regarding their specific situation.