1031 Exchange for Commercial Real Estate

1031 Exchange for Commercial Real Estate

A 1031 exchange is defined under section 1031 of the Internal Revenue Code. This code states that if an asset, usually some kind of real estate like land or building, is sold and the proceeds of the sale are reinvested in a similar kind of asset, then no gain or loss is recognized, permitting the deferment of capital gains taxes. A 1031 exchange is also called Like Kind exchange.

If an investor buys a commercial character and sells the character profitably after a period of time, he has to pay capital gains tax on that amount. But if the investor invests the amount in another commercial real estate, then he is not required to pay any tax, in which case, he defers his taxes till a later date.

To qualify for a 1031 exchange, both the relinquished character and the substitute character must be held for investment or for productive use in some business. You cannot exchange a personal residence. Once the investor decides to pursue a 1031 exchange, a Qualified Intermediary (QI) has to manager the proceedings. Then the commercial character is put on the market and the offer to buy the character is accepted. Escrow for the sale is opened and a preliminary title report is produced. The QI sends the necessary exchange documents to escrow closer for signing at character closing. Within the initial 45 days after the close of escrow on the sale of the handover character, the investor has to clarify a substitute character as per law. Within 180 days after the close of escrow on the sale of the relinquished commercial character, the investor closes on substitute character that was identified by them, consequently completing the exchange.

The most difficult part of 1031 exchange is the identifying of substitute character by the investor within a period of 45 days following the sale of the commercial character. The Internal Revenue Code is very strict and no extensions are allowed. It is best to carefully think about your substitute character alternatives before you chose to sell your character.

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