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1031 Exchanges
Using the Tax Code to Build Wealth |
If you sell a commercial real estate property used in business or held for investment, you will likely be subject to capital gains tax on the profits and depreciation recapture. But if you exchange that same property using an 80-year-old section of the Internal Revenue Code (IRC), you can defer taxes almost indefinitely.
If you decide to do a 1031 Exchange you have many more options than you may realize.
By selling your investments property, you are not limited to exchanging into another property of the same kind, but of like-kind. For example, if you sell an 100-unit multifamily property you do not have to replace it with another 100-unit multifamily property. In fact, you don’t even have to replace it with a multifamily property at all. You do however, have to replace it with real property, not personal property. That still leaves many options.
Additionally, with a 1031 Exchange you are not limited to replacing your property with a single property. You may sell one property and replace it with 2 or more properties as replacements. This strategy is used quite often by investors who are looking for diversity.
Here are some of the options that 1031 Exchange investors have for replacement properties - broken down into 3 categories:
| 1. Conventional Real Estate "Active" Brick and Mortar |
Conventional real estate are properties, most commonly bought and sold by real estate investors, such as: single-family rental homes, multi-family apartments, single-tenant commercial structures and multi-tenant office or retail properties.
These are the types of properties typically listed on MLS systems and often involve a state licensed real estate broker.
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| 2. Tenant-In-Common Properties "Passive" Security Investments |
Tenant-In-Common securities offerings are available to 1031 Exchange investors who seek a" hands off" investment while still taking advantage of the benefits associated with owning real estate. A Tenant-In-Common structure is one where multiple investors, with a maximum of 35, hold an undivided fractional interest in a property. Each investor holds title to the property for their portion of ownership. Typically these offerings consist of institutional grade real estate such as apartments, office buildings, retail centers etc as well as oil and gas royalties. The property is usually managed by one of the owners or a 3rd party. NOTE: This is not a limited partnership structure.
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| 3. Energy Properties |
You may not be aware that investment property may also be exchanged into existing energy (oil, gas or coal) properties.
This is not to be confused with oil and gas drilling programs which are not eligible for a 1031 Exchange but rather existing properties that are currently producing product. This is also covered in detail within the Energy Royalties section of this site. See: Energy Royalties |
The latter two categories, Tenant-In-Common Properties and Energy Properties, can be structured into a Regulation D offering and still qualify for a 1031 Exchange.
1031 Exchange rules may change.
Click here to learn more about 1031 Exchanges requirements and considerations. |
