What is a 1031 Exchange?
Internal Revenue Code Section 1031, or as it is more commonly known, 1031 Exchange, allows an investor to defer all immediate taxable liability on the sale of investment real estate indefinitely, as long as they purchase another investment property within a defined period of time and by meeting certain federally regulated guidelines.
Characteristics of a 1031 Exchange
A tax-deferred exchange is a transaction involving the sale and purchase of investment property or property held for productive use in a trade or business which meets requirements of Section 1031 of the Internal Revenue Code and qualifies for non-recognition of gain or loss. Technically, the exchange is tax-deferred, not tax-free, since the gain deferred in the transaction will be recognized on the ultimate sale of the replacement property received in the Exchange. During a tax-deferred exchange, the investor may not have constructive receipt of their exchange funds. Therefore, a Qualified Intermediary (QI) as an independent third party is needed to facilitate a 1031 Exchange transaction and hold the funds on behalf of the investor.
What are the advantages of a 1031 Exchange?
By deferring the tax, investors are in effect, receiving an interest-free loan from the federal government, in the amount they would have paid in taxes. Gains from depreciation recapture are postponed. Investors can proactively cut their tax burden by reallocating their investment portfolio, acquiring and disposing of properties without paying taxes on any gains. Assuming the value of their investment properties increase, the investor can repeatedly trade up, enriching their portfolio, all while repeatedly deferring taxes. Upon the death of the property owner deferred tax on any capital gains is forgiven and heirs receive a stepped-up basis equivalent to fair market value.
Value Requirement
Another critical component for completing a valid 1031 Exchange is the “value requirement.” Like-kind properties in an Exchange must be of similar value as well. The difference in value between a property and the one being exchanged is called boot.
If a replacement property is of lesser value than the property sold, the difference (cash boot) is taxable. If personal property or non-like-kind property is used to complete the transaction, it is also boot, but it does not disqualify for a 1031 exchange.
What properties qualify for a 1031 Exchange?
Any property that is “held for investment” or “for use in a trade or business qualify for 1031 exchanges. Examples include:
- Raw Land for shopping center
- Apartment building for shopping center
- Fee Interest in shopping center for 30+ leasehold in industrial building
- Hotel for farm
- Residential investment property for commercial investment property
What strategies qualify for Like Kind exchanges?
- Business Exchanges
- Second Homes
- Fractional Ownership-TIC/DST Strategies
- Mineral Rights (Oil and Gas)
- Easements; Water
- Contract Rights
Are you Accredited?
FINRA BROKERCHECK —PJ Lynch
©2020 PJL Investments. All Rights Reserved. Privacy Policy
All investments involve risk. Outcomes are not guaranteed.
PJL Investments and Emerson Equity LLC do not provide legal or tax advice. Securities and advisory services offered through Emerson Equity LLC, member FINRA, SIPC and a state Registered Investment Advisor. Emerson and PJL Investments are not affiliated.
1031 Risk Disclosure:
- There is no guarantee that any strategy will be successful or achieve investment objectives;
- Potential for property value loss – All real estate investments have the potential to lose value during the life of the investments;
- Change of tax status – The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities;
- Potential for foreclosure – All financed real estate investments have potential for foreclosure; ·Illiquidity – Because 1031 exchanges are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments;
- Reduction or Elimination of Monthly Cash Flow Distributions – Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions;
- Impact of fees/expenses – Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits
No offer to buy or sell securities is being made. Such offers may only be made to qualified accredited investors via private placement memorandum. Risks detailed in a private placement memorandum should be carefully reviewed, understood and considered before making such an investment. Prospective strategies and products used in any tax advantaged investment planning should be reviewed independently with their tax and legal advisors. Changes to the tax code and other regulatory revisions could have a negative impact upon strategies developed and recommendations made. Past performance and/or forward looking statements are never an assurance of future results.
Many of the investments offered will be only available to those investors meeting the definition of an Accredited Investor under SEC Rule 501(A) and offered as Regulation D private placement securities via a Private Placement Memorandum (“PPM”). Prospective investors must receive, read and understand all of the risks associated with buying private placement securities. Investments are not guaranteed or FDIC insured and risks may include but are not limited to illiquidity, no guarantee of income or guarantee that all tax advantages or objectives will be met and complete loss of principal investment could occur.
Risk Disclosure: Alternative investment products, including real estate investments, notes & debentures, hedge funds and private equity, involve a high degree of risk, often engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be highly illiquid, are not required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in distributing important tax information, are not subject to the same regulatory requirements as mutual funds, often charge high fees which may offset any trading profits, and in many cases the underlying investments are not transparent and are known only to the investment manager. Alternative investment performance can be volatile. An investor could lose all or a substantial amount of his or her investment. Often, alternative investment fund and account managers have total trading authority over their funds or accounts; the use of a single advisor applying generally similar trading programs could mean lack of diversification and, consequently, higher risk. There is often no secondary market for an investor’s interest in alternative investments, and none is expected to develop. There may be restrictions on transferring interests in any alternative investment. Alternative investment products often execute a substantial portion of their trades on non-U.S. exchanges. Investing in foreign markets may entail risks that differ from those associated with investments in U.S. markets. Additionally, alternative investments often entail commodity trading, which involves substantial risk of loss. NO OFFER OR SOLICITATION: The contents of this website: (i) do not constitute an offer of securities or a solicitation of an offer to buy of securities, and (ii) may not be relied upon in making an investment decision related to any investment offering by PJL Investments, Emerson Equity LLC, or any affiliate, or partner thereof. PJL Investments does not warrant the accuracy or completeness of the information contained herein.