1031 exchange:
Castle United Tax Tips Newsletter

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A Short Summary of

In a 1031 exchange the 1031 tax law requires that capital gains NOT be recognized. Capital gains are deferred in a 1031 exchange under tax law IRC section 1031. Today most investment real estate is transacted with a 1031 real estate exchange. In order to do 1031 exchange you must be want to exchange investment real estate in exchange for other investment real estate. Although other tangible assets qualify for 1031 exchange the most common 1031 exchange is the real estate exchange. The 1031 tax law which requires deferral of capital gains on real estate exchanges also requires deferral of capital losses in a 1031 exchange. An investor should therefore avoid a 1031 exchange when recognition of capital loss is desired. The 1031 tax law has allowed for deferral of capital gains in a real estate exchanges since the late 1930s, when this tax law was first enacted. However, only since the famous Starker Case in 1970 have delayed 1031 real estate exchanges allowed for the deferral of capital gains. In a delayed 1031 exchange the 1031 real estate exchange involves the sale of the relinquished property to one person and the purchase of the replacement property from a different person. The tax law allows for the deferral of capital gains in this type of 1031 real estate exchange.

A good option for 1031 exchange investors is often TIC or Tenant-In-Common Properties. This allows investors to buy a small share of a large building with professional due diligence to consider beforehand.

Member FEA, Bonded and Insured	Certified Exchange Specialist on Staff
Available 8 a.m. to 5 p.m. MST 888-899-1031 Download our 1031 Exchange Brochure (PDF 2.3MB)
Although we enjoy meeting our clients, many of our clients across the United States work with us only by phone, fax and E-mail. We understand how important it is for you to be assured of the security of your exchange! We want you to know: We guarantee our exchanges in writing. We carry a Multi-Million Dollar Fidelity Bond. Receive our Free 1031 information packet by email which includes our references!

1031 Exchange Overview

Like-kind has been broadly defined by the IRS to include ANY kind of real estate for ANY other kind of real estate.  For instance an apartment building can be traded for a farm or, a mobile home park can be traded for a warehouse .  In this regard real estate is a very special investment tool because very few other investments can be exchanged with this flexibility.  From a broker’s stand point, this allows the broker to meet the client’s needs to change the shape of their real estate investment .  The client may want an investment that is easier to manage .  Or, the client may want an investment that provides better cash flow.  Or, the client may want a property yet to be developed.  Use of a 1031 exchange allows the broker to meet the changing investment needs of the client while at the same time the client has no present tax liability from the exchange .  It’s a great tool for both the client and the broker. 

Now here is a good rule of thumb for you and your clients to follow:  IF NO TAX LIABILITY IS TO BE INCURRED THE CLIENT MUST TRADE EQUAL OR GREATER BOTH EQUITY AND FAIR MARKET VALUE.  This means that all cash received from the relinquished property must be used as down payment on the replacement property .  AND, the replacement property must be equal or larger in fair market value to the relinquished property.

1) All of the investor's capital from the sale of the relinquished property must be reinvested in the replacement property . This includes all down payment, capital improvement , principal reduction, and appreciation on the relinquished property. Any cash received by the investor at the sale of the relinquished property or at the purchase of the replacement property will be treated as " cash boot " and taxed. However, cash received in refinancing arrangements often will not be taxed.

2) Tax basis from the relinquished property is carried forward into the replacement property. The investor is not allowed to take another depreciation allowance. Tax basis in the replacement property is calculated by carrying forward the basis of the relinquished property and increasing it based on additional cash and mortgage.

3) The investor must exchange for like kind property . Real estate must be exchanged for real estate, not some other investment.

4) In order to fully defer gain the investor must acquire a replacement property of equal or greater value to the relinquished property. Trading down in value will result in recognition of some or all of the gain.

Conclusion: The only time you should sell rather than exchange is when you are getting out of real estate altogether.

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