What's a 1031 Exchange?

1031 Exchanges Explained

A 1031 exchange, also known as a like-kind exchange, is a powerful tax-deferral strategy that allows real estate investors to postpone paying capital gains taxes. By selling one investment property and reinvesting the proceeds into another of equal or greater value, investors can utilize this strategy under Section 1031 of the Internal Revenue Code to defer capital gains and depreciation recapture taxes.

Tax-deferred real estate exchanges have been a cornerstone of the U.S. tax code for over 100 years, with annual 1031 transaction volume currently between $80 and $100 billion. Moreover, if investors continue deferring gains through successive exchanges, they may eventually benefit from a basis step-up, which can effectively eliminate the deferred taxes altogether, making this strategy not just a deferral, but potentially a permanent tax-saving tool.

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Estimated Tax Liability – Example

In the following example, if an investor opts for a 1031 exchange, they would defer the $315,000 in taxes that would otherwise be paid to the US Federal and State governments. Consequently, they would incur no tax liability today, as opposed to paying $315,000.

An example tax calculation

1031 Exchange Rules

For a successful 1031 exchange, it’s crucial to adhere to certain key regulations. This section highlights a few of the essential rules and requirements that real estate investors must follow to defer capital gains taxes under Section 1031 of the Internal Revenue Code.

"Like-Kind" Property

Like Kind Property Icons
  • IRS term for real estate in the USA
  • No equipment, art, etc.

Business or
Investment Use

  • Business or investment uses
  • Personals residences don’t qualify

1031 Exchange Timeline

  • Identify replacement properties in 45 days
  • Close on replacement property in 180 days

Equal or Greater Value

For full tax deferral

  • Must buy more property
  • AND use all your sales equity

Same Taxpayer on Title

  • Same taxpayer on title (sale & buy)
  • Except DST property

No Funds to Exchanger

  • Exchanger can’t receive sales equity
  • Hire Qualified Intermediary (QI)

1031 Exchange Timeline

The 1031 exchange timeline is a critical component, requiring investors to identify a replacement property within 45 days and complete the purchase within 180 days of selling their original asset. This stringent timeline can pose challenges, as investors must quickly find suitable properties and finalize transactions, which can be particularly demanding in competitive or fluctuating real estate markets.

Who's Involved in a 1031 Exchange

1031 Exchanger
  • Real estate investor performing a 1031 exchange – sells & buys investment real estate
RE Broker to Sell
  • Markets & sells currently owned property
Qualified Intermediary
  • Holds & wires funds for you, required per 1031 IRS rules
RE Broker to Buy (where we come in)
  • Helps you hunt, find, negotiate & buy investment real estate – syndicated or traditional
Certified Public Accountant (CPA)
  • Evaluates your tax position and reports your 1031 exchange
Real estate transaction with a happy couple
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The go-to source for your 1031 replacement real estate needs

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Contact

Zack Brough

7960 B Soquel Dr, Ste 253
Aptos, CA 95003
(415) 336-9225
zack@1031investmentstrategies.com

Mike Ghirardo

7200 Redwood Blvd, Ste 402
Novato, CA 94945
(415) 328-3919
mike@1031investmentstrategies.com

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Disclosures

General Disclosures
For more information on Emerson Equity, please visit FINRA’s BrokerCheck website. You can also download a copy of Emerson Equity’s Customer Relationship Summary to learn more about their role and services.

Important Disclosure
The contents of this communication: (i) do not constitute an offer of securities or a solicitation of an offer to buy securities, (ii) offers can be made only by the confidential Private Placement Memorandum (the “PPM”) which is available upon request, (iii) do not and cannot replace the PPM and is qualified in its entirety by the PPM, and (iv) may not be relied upon in making an investment decision related to any investment offering by the issuer, or any affiliate, or partner thereof (“Issuer”). All potential investors must read the PPM and no person may invest without acknowledging receipt and complete review of the PPM. With respect to any “targeted” goals and performance levels outlined herein, these do not constitute a promise of performance, nor is there any assurance that the investment objectives of any program will be attained. All investments carry the risk of loss of some or all of the principal invested. These “targeted” factors are based upon reasonable assumptions more fully outlined in the Offering Documents/ PPM for the respective offering. Consult the PPM for investment conditions, risk factors, minimum requirements, fees and expenses and other pertinent information with respect to any investment. These investment opportunities have not been registered under the Securities Act of 1933 and are being offered pursuant to an exemption therefrom and from applicable state securities laws. All offerings are intended only for accredited investors unless otherwise specified. Past performance is no guarantee of future results. All information is subject to change. You should always consult a tax professional prior to investing. Investment offerings and investment decisions may only be made on the basis of a confidential private placement memorandum issued by Issuer, or one of its partner/issuers. Issuer does not warrant the accuracy or completeness of the information contained herein. Thank you for your cooperation.

Securities through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

1031 Risk Disclosure:

  • There is no guarantee that any strategy will be successful or achieve investment objectives;
  • Potential for property value loss – All real estate investments have the potential to lose value during the life of the investments;
  • Change of tax status – The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities;
  • Potential for foreclosure – All financed real estate investments have potential for foreclosure;
  • Illiquidity – Because 1031 exchanges are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments.
  • Reduction or Elimination of Monthly Cash Flow Distributions – Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions; -Impact of fees/expenses
  • Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits

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