If you have investment property or properties, chances are you might have had the term 1031 Exchange or a Like Kind Exchange. Though the term actually refers to section 1031 of the Internal Revenue Service code, there is no reason to be nervous. The attorneys at Morris Law Firm are here to help you understand how this code can be to your benefit.
People who own investment properties are most likely to seek a 1031 exchange. If this is you, it is highly recommended that you have legal assistance to help you navigate the ins and outs of this process.
Morris Law Group has called Edina home since 2007. Recently relocated to the France Avenue, our firm provides the most cost-effective client services in the Twin Cities in the areas of real estate, business development, commercial litigation and more. Our attorneys will fight for you until a positive outcome is reached. Give us a call today for a free consultation: 952.832.2000.
What is a 1031 Exchange?
A 1031 Exchange lets an investor defer payment of capital gains taxes on an investment property sold in a real estate transaction, but only if another “like kind” property is bought with the profits from the sale of the original property.
A 1031 Like Kind Exchange may sound simple, but it can be very tricky. That’s where the attorneys at Morris Law Firm can help you. The property you are hoping to acquire may be owned by an investor who may not want your property. In these situations, the exchange may become a delayed or “third-party” exchange. In a third-party exchange, someone else takes care of the finances from the sale of your property and uses it to purchase the new property on your behalf. (But we’ll get more into that further down.)
If you own a property that is worth more now than when you originally bought it, a 1031 Like Kind Exchange may be right for you.
Picking the Right Kind of Exchange
Before you get started, you should determine what kind of exchange would apply to your situation. The four most common types of like kind exchanges are: simultaneous, construction/improvement, reverse and delayed.
Typically, a simultaneous exchange is an option when the two different properties close “simultaneously” – or on the same day. This can be done by a two-party trade where deeds are exchanged; by using a third-person to perform the transaction for you and the other party involved; or with a qualified facilitator to organize and execute the entire exchange.
Simultaneous exchanges may sound simple but they can be quite fragile. Any delay in the finances can disqualify the exchange. When this happens, the full amount of taxes are applied to your property. The details are key. That’s why the attorneys at Morris Law Firm can help you avoid a misstep in the process, which can ultimately cost you a lot of money.
During a construction/improvement exchange, an intermediary is put in charge of the replacement property for a set period of time – typically 180 days. During this time, you can use tax-deferred funding to improve the property.
To do this, the full amount of equity from the exchange has to be used for improvements or as a down payment by the final day of the intermediary’s charge; the exchange property must be the same amount or of greater value when the deed is returned to you (the improvements must be in place before the deed can be returned); and you must receive the same property identified in the exchange.
A reverse exchange happens when you acquire a replacement property before identify it.
What you should know is that reverse exchanges have one very specific requirement: cash. The parties involved decide with of their properties will be acquired and will which will hold. If the properties are not closed on by a specified amount of time – again, typically 180 days – the exchange is voided.
A reverse exchange, also known as a forward exchange, occurs when you acquire a replacement property through an exchange accommodation titleholder before you identify the replacement property. In theory, this type of exchange is very simple: you buy first and you pay later.
In this exchange the parties have a set amount time to establish a property to be relinquished. Following that set time, the parties involved get a new established time to complete the sale of the exchange property and “close out” the reverse exchange by purchasing the replacement property.
What makes reverse exchanges tricky is that they require all cash. Additionally, many banks won’t offer loans for reverse exchanges. Taxpayers must also decide which of their investment properties are going to be acquired and which will be “parked.” A failure to close on the relinquished property during the established time period that the acquired property is parked will result in a forfeit of the exchange.
In a delayed exchange, the party initiating the exchange transfers their property first, before they acquire the replacement property.
If you are involved in a delayed exchange, there are a few things you must do before the exchange can begin: Advertise and/or promote the property, find a buyer, and organize the sale and purchase agreement.
Then you have to hire an intermediary to begin the sale of your property. Once sold, the intermediary will oversee the funds from the sale for a set amount of time while you acquire a like-kind property.
The delayed exchange is the most common – and most popular – because it offers several tax benefits.
Navigating a 1031 Exchange doesn’t have to be confusing. Let us offer you some peace of mind. The attorneys at Morris Law Firm are here to help you. Integrity and trust is the foundation of our practice. Our passion for client success is matched only by our experience, our reputation for excellence, and our deep understanding of each and every client’s individual needs.
About Morris Law Group
Morris Law Group is an Edina, Minnesota-based law firm providing cost-effective client services in the areas of real estate, business development, commercial litigation and more. Founded in 2002 by Richard L. Morris, the firm’s experienced and skilled attorneys fight for our clients until a positive outcome is reached.
We believe that relationships matter, whether a client is trying to navigate a purchase agreement, get a business off the ground, or dissolve a partnership. Our lawyers appear regularly in state and federal court, in administrative hearings, and in various alternative dispute resolution forums, including mediation and arbitration. And they do it all with a personal touch that only a law firm focused on community and teamwork can bring.
Morris Law Group is the best Minnesota law firm for all of your real estate and business legal needs. We advocate for our clients with professionalism, empathy, and with a results-driven approach.
Let’s get started today. For more information or to book a free consultation, call 952.832.2000 or visit morrislawmn.com.