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1031 Exchange Explained IRC Section 1031 provides that no gain or loss shall be recognized on the exchange of investment property is held for productive use in a trade or business, or for investment. A tax-deferred exchange is a method by which a property owners trades one or more relinquished investment properties for one or more replacement investment properties 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 IRC section 1031 is to allow the property owners to reinvest the sale proceeds into another investment property, foregoing any economic gains that may have been realized from the sale. If you have recently sold, or are thinking of selling investment property, we can assist in matching you with a qualified TIC advisor. A TIC 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-Investment Property Rule - exchangers must identify up to, but no more than three potential replacement investment properties during the acquisition period. The 200% Rule - Stipulates that the aggregate value of all replacement investment properties in the exchange must not exceed 200% of the value of the relinquished investment property at the time of sale. The 95% Exception - Finally, the 95% rule stipulates that the aggregate value of all like kind replacement investment properties must account for at least 95% of the value of the relinquished investment property 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 TIC 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 investment property must be used to acquire the replacement investment property. Second Requirement: The amount of equity held in the relinquished investment property must be less than or equal to the amount of equity held in the replacement investment property. This is to insure no overextension of the assets by the property owner. Third, each property owner 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 investment property for other like kind property. A definition of such may be found in IRC section 1031. For more information on 1031 exchanges or tenants in common exchanges, or to be put in contact with a licensed TIC advisor, contact us today! Find A TIC 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 property owner elect a licensed TIC advisor to oversee their transaction. This TIC advisor (read registered representative) will be able to facilitate the exchange in a timely manner while watching out for the property owner’s best interests and investment objectives. A TIC 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 investment property for the exchange 3. Answer any questions you may have regarding the exchange process 4. Manage the exchange from start to finish