1031 Exchange Properties

A 1031 exchange allows real estate investors to sell property and defer paying taxes by reinvesting the proceeds into a "like-kind" investment property or properties. In order to do this, the replacement property must be of equal or greater value and all of the equity from the sale must be reinvested into the new property or properties. There are companies that specialize in locating exchange properties for investment property owners, buyers and sellers.

With a tenants in common (TIC) interest ownership, also known as co-ownership of real estate (CORE), investors can defer their taxes as well as upgrade their investment into larger, commercial properties. In commercial real estate, investors deal more with corporations and contracts than with people, so it makes sense to invest in a portfolio of properties.

Tenant in common is a form of holding title to real estate that lets you own an interest in a property and satisfy the like-kind requirement for a 1031 exchange. It is useful when you want to complete a 1031 exchange but do not want to reinvest in another property that requires a lot of management.

Why Perform a 1031 Exchange?

There are many reasons why investors would want to do a 1031 exchange. The concept was designed for deferring taxes, but there are other purposes for completing such a deal. For example, you might have some raw land that is not producing income, which you can exchange for property that would give you cash flow, such as rental property.

You could start rebuilding equity by exchanging with new real estate properties whose appreciation has hit a ceiling. Or, you can exchange management-intense properties for something easier to own. You might also exchange property to take advantage of tax deductions like depreciation, which you don't have with your original property, as in the case of raw land.

Another strategy many investors use is in retirement planning. Consider a 1031 exchange a free loan from the government. With proper planning, you can exchange properties throughout your lifetime and neither you nor your heirs will ever have to pay taxes on the capital gains. Each time you exchange, because you save on taxes, there is more money to put toward the reinvestment.

Identifying Replacements

When you first identify replacement properties, it is helpful to have backup properties in mind. You can identify up to three replacements, and this is a wise practice. Sometimes, sellers use the 180-day deadline to raise the price on their property, knowing that you will have to close within that time frame.

If you don't like the new terms, you can back out and still take advantage of the exchange, because you have other properties on your list. You might not get your first choice, but it gives you the leverage to walk away from any deal you are not comfortable with. If you have any questions about your exchange, consult with your qualified intermediary or a real estate attorney.