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    The sale of a business or investment real estate can create a large tax liability. A properly structured tax deferred exchange under Internal Revenue Code §1031, however, allows businesses and individuals to defer the recognition of the capital gains or other taxes associated with the sale of most business or investment real estate, as long as new assets are purchased to replace the existing assets. In general, most tax deferred exchanges are structured as a real property or real property rights.

    To be eligible for the favorable tax treatment afforded by an exchange, the property or business asset to be disposed of must have been held by the client for productive use in a trade or business, or for investment purposes, and be exchanged for like-kind replacement property that will be held by the client for similar purposes.  Exchanges allow businesses and individuals the flexibility to sell property to whomever they wish, and to buy new property from whomever they wish. There is no requirement that property be “swapped” to be eligible for an exchange nor do exchange transactions require any significant changes to the terms of the sale and purchase agreements.

   By utilizing an exchange clients are able to maximize their capital by deferring the taxes that would otherwise be incurred on an outright sale of their property and use the entire amount of the equity from the exchange to acquire substantially more replacement property. Properly structured and administered, an exchange becomes an invaluable tax saving tool and an integral element of your investment strategy.   For a more detailed explanation of the various elements and regulatory requirements of tax deferred exchanges, please visit our affiliate’s website at www.Mutual-Exchange.com

Q. Why would I want to defer paying capital gains taxes - they’ll be due sooner or later anyway?

A. The purpose of a 1031 exchange is to defer the payment of capital gains taxes that would otherwise be due on the sale of business or investment property - thus leaving the owner with more money to invest in replacement property. A 1031 exchange does not eliminate taxes. It defers taxes and allows the owner to use the deferred tax amount for continued business or investment purpose.
 

Q. Why would I want to defer paying capital gains taxes - they’ll be due sooner or later anyway?

A. By deferring the taxes you’ll be giving yourself more cash to invest in a replacement property. You may also be able to defer paying the tax until you are in a stronger tax position. You’ll have to talk to your accountant or tax advisor about finding the right solution for your situation.
 

Q. How does it work?

A. There are, of course, IRS rules that must be met to complete a successful 1031 exchange. You should consult your attorney, accountant or other tax advisor to explain these rules. But, in general terms, the owner of business or investment property sells the property and uses the proceeds to acquire replacement property within 180 days. The capital gains tax that would have been due on the sale is deferred, usually until the eventual sale of the replacement property. The owner cannot possess or control the sale proceeds during the period between the sale of the first property and the purchase of the replacement property. During this period, the proceeds are typically held by a "Qualified Intermediary", such as Mutual-Exchange, LLC.
 

Q. What kind of property is eligible for a 1031 exchange?

A. Almost any kind of business or investment property qualifies. Land, apartments, office buildings, retail space and other real property are all eligible. If you want to fully defer all capital gains taxes, make sure the replacement property is of equal or greater value than the one you sold.

Q. Can I use a 1031 exchange when I sell my personal residence?

A. No. You may see your home as one of the most important investments you'll ever make, but the Internal Revenue Code does not consider homes that you use as your private residence to be investment property.