As a commercial property owner, you’re likely aware of the many benefits associated with 1031 Exchanges. From avoiding capital gains tax to deferring payments on the entirety of your properties’ value, these Exchanges offer powerful financial advantages for savvy investors.
While you may understand some details about these transactions, you might not be as familiar with how 1031 Exchanges differ from traditional transactions—and why understanding that distinction and its implications are important for anyone looking to maximize their return on investments.
Let’s review everything you need to know about 1031 Exchanges compared to normal real estate transactions so that your decisions can be educated when it’s time to sell or buy into new projects!
1031 Exchange vs. Normal Transaction
A 1031 Exchange involves selling one commercial property and using the proceeds to purchase a like-kind property within a specified time frame. In a normal transaction, the property owner sells the property to a buyer and receives the proceeds.
The significant difference between the two is that in a 1031 Exchange transaction, you defer paying capital gains taxes immediately, ultimately deferring your taxes until you sell your new property. But how is this done?
To complete a 1031 Exchange transaction, you need to seek the services of a qualified intermediary. This professional is an independent third party who facilitates the transaction and acts as the seller while holding onto the funds from the sale until they are used to purchase the new property. The qualified intermediary ensures that the funds from the sale are used to purchase the replacement property.
By using a qualified intermediary, the seller is exempt from receiving the sale proceeds, which, if they did, would automatically disqualify them from tax deferral treatment by the IRS. The qualified intermediary also prepares the necessary legal documents and ensures that the transaction complies with IRS regulations. Additionally, they can advise the seller on the best timing for the Exchange.
The main and only difference between a 1031 Exchange transaction and a regular property transaction is using a qualified intermediary to facilitate the transaction and defer the payment of taxes.
As a commercial property owner, this transaction method can provide significant advantages and tax benefits. If you are interested in 1031 Exchanges, choose a qualified intermediary with an in-depth understanding of IRS regulations.
Consulting with a commercial real estate expert can also help maximize your property value.
Ready to take advantage of a 1031 Exchange?