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What is a §1031 Exchange?

A §1031 Exchange—a transaction authorized by §1031 of the IRS Tax Code—allows a tax payer to sell one investment property and buy another like-kind investment property while simultaneously deferring the capital gains tax. It may be one of the more preferred strategies for investors who are selling for other reasons outside of liquidity, and to create wealth.

What are like-kind properties?

Like-kind refers to the type of property being exchanged. These properties may be of the same nature or character, even if they differ in grade or quality. §1031 allows you to exchange any real estate investment for any other type of real estate investment. Examples:

What is the §1031 Exchange process?

The process has four components:

Sale of the relinquished property.
Closing the relinquished property
through a Qualified Intermediary.
Identification of the replacement
property within 45 days of closing
the relinquished property.
Closing on the replacement
property within 180 days of closing
the relinquished property.

Failure to identify replacement property(ies) in writing within the 45-day identification timeframe will disqualify the exchange. Likewise, failure to close on the replacement property(ies) within the 180 days of the closing of the relinquished property will disqualify the exchange.

§1031 Exchange Do’s and Don’ts

Do advanced planning.
Do not miss your identification and exchange deadlines. Non-compliance disqualifies the exchange.
Do not do an exchange yourself. The IRS requires a Qualified Intermediary to complete an exchange.
Ideally, sell before you purchase.
Do not dissolve partnerships or change the manner of holding the title during the exchange. These changes may jeopardize the exchange.
Include Exchange Addendum language in your sales contracts.
Consult your CPA. Ensure the exchange is suitable for you.
Exchanging up—The rule of thumb is . . . Exchange Even or Up in Value and Exchange Even or Up in Equity and in debt.
Receive only “like-kind” replacement property.
Use all proceeds from the relinquished property for purchasing the replacement property.

Securities offered through Welton Street Investments LLC, 4600 S. Syracuse Street, Suite 530, Denver, CO 80237, 888.569.1031. This is neither an offer to sell nor a solicitation of an offer to buy a security. Such an offer may only be made by means of a private placement memorandum. As with any real estate investment, there are various risks including, but not limited to: loss of principal, variations in occupancy which may negatively impact cash flow, limited liquidity, and limits on management control of the property. Grisenia Matos is a Registered Representative of Welton Street Investments.