Why do a 1031 Exchange?

Below is a simple guide to help you determine if your situation qualifies for a 1031 Exchange and if a 1031 Exchange may be the best option for your upcoming real estate transaction. There are two questions any person must ask themselves when they consider a 1031 exchange. Can I do a 1031 exchange? Do I want to?

Do you, or your entity, pay US taxes? If yes, then you are eligible for a 1031 Exchange. Next, do you want to continue to own real estate? Either directly or via a DST? If you answered yes to both questions then keep reading.

If the property you are selling is “real property” that has been held for business or investment use? Then the property should qualify for a 1031 Exchange.

Are you planning on reinvesting the full sale proceeds from the sale of your property into another property that will be held for business or investment use? If yes, then you qualify for a 1031 Exchange. However, if the answer is no, perhaps you plan to reinvest your proceeds into a second home for yourself, then the transaction would not qualify for a 1031 Exchange.

Do you plan on reinvesting all the proceeds from the sale into a new business or an investment use property? If yes, or if you plan to reinvest the majority, then a 1031 Exchange would be a good fit. If you need or want to keep most of the proceeds rather than reinvest, or if you want to use the proceeds for personal use then a 1031 Exchange wouldn’t be a good fit.

Have you already sold your property and received the proceeds? If yes, then you no longer qualify for a 1031 Exchange because you already received the gain which is now taxable.1031 exchanges rely on a third party to hold funds in order to be considered valid, which is what we do here at 1031 Prime!

Your answers to the basic questions above should give you a good idea whether a 1031 Exchange is a good fit for your situation or not. As always, consult your tax advisors to determine the right strategy. If you think a 1031 exchange is right for you, you can reach out to 1031 Prime here to be your unrelated third party. If you’re interested in learning more for yourself you can also read an IRS publication about 1031 here.

*the above does not constitute tax or legal advice. Please reach out directly to your advisors for guidance on your specific situation.