FAQs

Like Kind Exchanges, also known as tax-deferred exchanges, are defined by IRC section 1031. Since 1921, section 1031 has permitted a taxpayerThe person or entity that is completing the tax-deferred, like-kind exchange transaction, commonly referred to as the Exchangor. to exchangeThe sale or disposition of real estate or personal property (relinquished property) and the acquisition of like-kind real estate or personal property (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations in order to defer Federal, and in most cases state, capital gain and... business-use or investment assets for other like-kind business use or investment assets without recognizing taxable gain on the sale of the old assets. The taxes which otherwise would have been due from the sale are thus deferred. Section 1031 transactions range from 2-party “swaps” to more complex non-simultaneous 1031 Exchanges involving separate buyers and sellers. Qualifying assets include commercial, agricultural and rental real estate. Tax rules for non-simultaneous exchanges require the use of an independent third party Qualified IntermediaryAn unrelated party (TransUnion Exchange Corporation) who participates in the tax-deferred, like-kind exchange to facilitate the disposition of the Exchangor’s relinquished property and the acquisition of the Exchangor’s replacement property. The Qualified Intermediary has no economic interest except for any compensation (exchange fee) it may receive for facilitating the exchange as defined in Section 1031 of the Internal Revenue Code.... (QI). The QI holds the sale proceeds for the benefit of the taxpayer during the exchange, disbursing funds for purchase of like-kind replacement propertyThe like-kind property to be acquired or received by the Exchangor in the tax-deferred, like-kind exchange transaction., and returning any unused funds to the taxpayer at the end of the exchange. Section 1031 Exchanges must be completed within 180 days. Taxpayers recognize gain and pay tax on any unused funds or when they ultimately “cash out” of their property.

All businesses, manufacturers, real estate investors, companies in the construction, trucking, rail, marine and equipment leasing industries, farmers, ranchers, individuals and more make good use of like-kind exchanges. 1031 Like-Kind Exchanges are one of the few incentives available to and used by taxpayers of all sizes. A recent industry survey showed that 60% of exchanges involve properties worth less than $1 million, and more than a third are worth less than $500,000. Qualified Intermediaries (QI) facilitate non-simultaneous tax-deferred exchanges of investment and business use properties for taxpayers of all sizes, from individuals of modest means to high net worth taxpayers and from small businesses to large entities.

Following a like-kind exchangeThe sale or disposition of real estate or personal property (relinquished property) and the acquisition of like-kind real estate or personal property (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations in order to defer Federal, and in most cases state, capital gain and..., the owner of business use or investment real estate (“investor”) has more capital to acquire replacement real estate. This may result in increasing cash flow and/or increasing appreciation potential of the assetAnything owned that has monetary value.. In addition, the economy benefits because the investor cannot receive full tax deferral without fully reinvesting into the replacement propertyThe like-kind property to be acquired or received by the Exchangor in the tax-deferred, like-kind exchange transaction.. The transactions generate taxable income in the form of title and escrow fees, real estate commissions, legal fees, and accounting fees as well as the purchase of goods and services if the replacement property is being improved. Local and state governments also benefit from fees and taxes which are generated by the real estate transactions. Since real estate located in foreign countries are not like-kind to real estate in the United States, section 1031 promotes reinvestment and job growth within our US borders.

With 1031 Exchanges, taxes are deferred but not eliminated. These legitimate transactions utilize an important tax planning tool. Payment of tax occurs:

1. upon sale of the replacement assetAnything owned that has monetary value.;
2. incrementally, through increased income taxTaxes owed to the federal government based upon the taxpayer’s income, including income derived from a property sale. In a 1031 Exchange, income generated when property is transferred is not immediately taxed. The income tax is deferred until a new taxable event occurs. due to foregone depreciationPeriodic wearing away of property over the property’s economic life. The I.R.S. requires investors and business owners to take a tax deduction on the amount of a property’s depreciation. The practice of amortizing or spreading the cost of depreciable property over a specified period of time, usually its estimated depreciable life. To put it another way, you are allowed a...; or
3. by inclusion in a decedent’s taxable estate, at which time the value of the replacement asset could be subject to estate tax at a rate more than double the capital gains tax rate.

Having nothing at all to do with footwear, “BootNon-like-kind property (cash or other property) given by one party to another party in a tax-deferred, like-kind exchange that is taxable. For instance, if you trade in a delivery truck on a new model, the cash you pay in addition to your old truck is boot. Boot received may be offset by boot given. (See also Mortgage Boot.)” is a term that refers to the items of personal property and/or cash that are necessary to even out an exchangeThe sale or disposition of real estate or personal property (relinquished property) and the acquisition of like-kind real estate or personal property (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations in order to defer Federal, and in most cases state, capital gain and.... Boot is property that is received in an exchange but is not “like-kind” as to other property acquired in an exchange transaction. Boot is defined as the “fair market valueThe price at which property would change hands between a buyer and a seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts.” of the non-qualified property received in an exchange.

The use of a Qualified IntermediaryAn unrelated party (TransUnion Exchange Corporation) who participates in the tax-deferred, like-kind exchange to facilitate the disposition of the Exchangor’s relinquished property and the acquisition of the Exchangor’s replacement property. The Qualified Intermediary has no economic interest except for any compensation (exchange fee) it may receive for facilitating the exchange as defined in Section 1031 of the Internal Revenue Code.... is essential to completing a successful IRC §1031 tax deferred exchangeThe sale or disposition of real estate or personal property (relinquished property) and the acquisition of like-kind real estate or personal property (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations in order to defer Federal, and in most cases state, capital gain and.... Investment Property ExchangeThe sale or disposition of real estate or personal property (relinquished property) and the acquisition of like-kind real estate or personal property (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations in order to defer Federal, and in most cases state, capital gain and... Services, Inc. (IPX1031), as a professional Qualified IntermediaryAn unrelated party (TransUnion Exchange Corporation) who participates in the tax-deferred, like-kind exchange to facilitate the disposition of the Exchangor’s relinquished property and the acquisition of the Exchangor’s replacement property. The Intermediary has no economic interest except for any compensation (exchange fee) it may receive for acting as an Intermediary in facilitating the exchange as defined in Section 1031 of..., performs several vital functions in an exchange and operates under the “safe harbor” set out in Treas. Reg. 1.1031(k)-1(g)(4). Although the process of completing an exchange is relatively simple, the rules are complicated and filled with potential pitfalls.

When selecting a Qualified IntermediaryAn unrelated party (TransUnion Exchange Corporation) who participates in the tax-deferred, like-kind exchange to facilitate the disposition of the Exchangor’s relinquished property and the acquisition of the Exchangor’s replacement property. The Qualified Intermediary has no economic interest except for any compensation (exchange fee) it may receive for facilitating the exchange as defined in Section 1031 of the Internal Revenue Code...., the Exchanger must feel confident that their Qualified IntermediaryAn unrelated party (TransUnion Exchange Corporation) who participates in the tax-deferred, like-kind exchange to facilitate the disposition of the Exchangor’s relinquished property and the acquisition of the Exchangor’s replacement property. The Intermediary has no economic interest except for any compensation (exchange fee) it may receive for acting as an Intermediary in facilitating the exchange as defined in Section 1031 of... is a professional company with the competence and commitment to provide high quality service and security for exchangeThe sale or disposition of real estate or personal property (relinquished property) and the acquisition of like-kind real estate or personal property (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations in order to defer Federal, and in most cases state, capital gain and... funds.

A “reverse” exchangeThe sale or disposition of real estate or personal property (relinquished property) and the acquisition of like-kind real estate or personal property (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations in order to defer Federal, and in most cases state, capital gain and... occurs when the taxpayerThe person or entity that is completing the tax-deferred, like-kind exchange transaction, commonly referred to as the Exchangor. acquires the replacement propertyThe like-kind property to be acquired or received by the Exchangor in the tax-deferred, like-kind exchange transaction. before transferring the relinquished propertyThe property to be sold or disposed of by the Exchangor in the tax-deferred, like-kind exchange transaction.. A “pure” reverse exchangeA tax-deferred, like-kind exchange transaction whereby the replacement property is acquired first and the disposition of the relinquished property occurs at a later date., where the taxpayer owns both the relinquished and replacement properties at the same time, is not permitted.

For an exchangeThe sale or disposition of real estate or personal property (relinquished property) and the acquisition of like-kind real estate or personal property (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations in order to defer Federal, and in most cases state, capital gain and... to satisfy IRC §1031, the taxpayerThe person or entity that is completing the tax-deferred, like-kind exchange transaction, commonly referred to as the Exchangor. that will hold the title to the Replacement PropertyThe like-kind property to be acquired or received by the Exchangor in the tax-deferred, like-kind exchange transaction. must be the same taxpayer that held title to the Relinquished PropertyThe property to be sold or disposed of by the Exchangor in the tax-deferred, like-kind exchange transaction.. However, business considerations, liability issues, and lender requirements may make it difficult for the Exchanger to keep the same vesting on the Replacement Property. Exchangers must anticipate these vesting issues as part of their advanced planning for the exchange

Since 1984, IRC §1031 has specifically excluded exchanges of partnership interests from non-recognition treatment. Thus, §1031 does not apply to an exchangeThe sale or disposition of real estate or personal property (relinquished property) and the acquisition of like-kind real estate or personal property (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations in order to defer Federal, and in most cases state, capital gain and... of interests in a partnership regardless of whether the interests exchanged are general or limited partnershipInvestors who pool their money to develop or purchase income-producing properties. Income from these properties is distributed as dividend payments. In a limited partnership, each limited partner’s liability is limited to the amount of his or her investment. A limited partner only contributes money and is not actively involved in the business. A limited partnership must have one general partner,... interests or are interests in the same partnership or in different partnerships, even if both partnerships own the same kind of real propertyLand and buildings (improvements), including but not limited to homes, apartment buildings, shopping centers, commercial buildings, factories, condominiums, leases of 30-years or more, quarries and oil fields. All types of real property are exchangeable for all other types of real property. In general, state law determines what constitutes Real Property..

Properties are of like-kind if they’re of the same nature or character, even if they differ in grade or quality. Real properties generally are of like-kind, regardless of whether they’re improved or unimproved. For example, an apartment building would generally be like-kind to another apartment building.

The tax deferred exchangeThe sale or disposition of real estate or personal property (relinquished property) and the acquisition of like-kind real estate or personal property (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations in order to defer Federal, and in most cases state, capital gain and..., as defined in §1031 of the Internal Revenue Code, offers taxpayers one of the last great opportunities to build wealth and save taxes. By completing an exchangeThe sale or disposition of real estate or personal property (relinquished property) and the acquisition of like-kind real estate or personal property (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations in order to defer Federal, and in most cases state, capital gain and..., the TaxpayerThe person or entity that is completing the tax-deferred, like-kind exchange transaction, commonly referred to as the Exchangor. (Exchanger) can dispose of investment or business-use assets, acquire Replacement PropertyThe like-kind property to be acquired or received by the Exchangor in the tax-deferred, like-kind exchange transaction. and defer the tax that would ordinarily be due upon the sale.

A successful IRC §1031 exchangeThe sale or disposition of real estate or personal property (relinquished property) and the acquisition of like-kind real estate or personal property (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations in order to defer Federal, and in most cases state, capital gain and... transaction requires planning, expertise and support. Read more here…

While both 721 and 1031 exchanges provide a way to defer capital gains taxes, a 1031 exchangeThe sale or disposition of real estate or personal property (relinquished property) and the acquisition of like-kind real estate or personal property (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations in order to defer Federal, and in most cases state, capital gain and... involves exchanging one property for another of “like-kind.” In contrast, a 721 exchangeThe sale or disposition of real estate or personal property (relinquished property) and the acquisition of like-kind real estate or personal property (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations in order to defer Federal, and in most cases state, capital gain and... involves transferring property into an operating partnership in return for its shares or units.

Read our article on the following page.

A 721 exchangeThe sale or disposition of real estate or personal property (relinquished property) and the acquisition of like-kind real estate or personal property (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations in order to defer Federal, and in most cases state, capital gain and..., often called an “UPREIT” (Umbrella Partnership Real Estate Investment TrustA legal entity created by an individual in which one person or institution holds the right to manage property or assets for the benefit of someone else.), allows investors to transfer real estate into an operating partnership in exchange for shares or units, without triggering a taxable event.

While both 721 and 1031 exchanges provide a way to defer capital gains taxes, a 1031 exchangeThe sale or disposition of real estate or personal property (relinquished property) and the acquisition of like-kind real estate or personal property (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations in order to defer Federal, and in most cases state, capital gain and... involves exchanging one property for another of “like-kind.” In contrast, a 721 exchangeThe sale or disposition of real estate or personal property (relinquished property) and the acquisition of like-kind real estate or personal property (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations in order to defer Federal, and in most cases state, capital gain and... involves transferring property into an operating partnership in return for its shares or units.

Read our article on the following page.

A 721 exchangeThe sale or disposition of real estate or personal property (relinquished property) and the acquisition of like-kind real estate or personal property (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations in order to defer Federal, and in most cases state, capital gain and... can be beneficial when an investor wants to diversify their real estate holdings, receive a steady income stream, or transition to a more passive investment role. It also offers a way to become a part of a larger real estate portfolio.

The primary criterion is that the property must be transferred to a REIT or its operating partnership. The specifics may vary based on the REIT’s strategy and investment focus.

The primary advantage of a 721 exchangeThe sale or disposition of real estate or personal property (relinquished property) and the acquisition of like-kind real estate or personal property (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations in order to defer Federal, and in most cases state, capital gain and... is the deferral of capital gains tax when property is transferred to a REIT in exchange for its units or shares. However, taxes will be due upon the eventual sale of those shares or units.

Yes, many REITs provide an option for investors to convert their operating partnership units into REIT shares, which can then be publicly traded.

One key limitation is that not all REITs will accept properties in exchangeThe sale or disposition of real estate or personal property (relinquished property) and the acquisition of like-kind real estate or personal property (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations in order to defer Federal, and in most cases state, capital gain and... for operating partnership units. Additionally, the exchange can be more complex than a standard 1031 exchangeThe sale or disposition of real estate or personal property (relinquished property) and the acquisition of like-kind real estate or personal property (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations in order to defer Federal, and in most cases state, capital gain and... and might involve more intricate negotiations and legal documentation.

Unlike the 1031 exchangeThe sale or disposition of real estate or personal property (relinquished property) and the acquisition of like-kind real estate or personal property (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations in order to defer Federal, and in most cases state, capital gain and..., which has specific identification and acquisition timelines, the 721 exchangeThe sale or disposition of real estate or personal property (relinquished property) and the acquisition of like-kind real estate or personal property (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations in order to defer Federal, and in most cases state, capital gain and... doesn’t have set time constraints. However, the specifics of the deal and the agreement with the REIT can introduce certain deadlines.

In such scenarios, the investor could receive their proportionate share of the assets or the proceeds from the liquidation. This event might trigger a taxable event, and the capital gains tax would be applicable.

Yes, this strategy, often referred to as a “1031 into 721” exchangeThe sale or disposition of real estate or personal property (relinquished property) and the acquisition of like-kind real estate or personal property (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations in order to defer Federal, and in most cases state, capital gain and..., allows investors to first exchange real propertyLand and buildings (improvements), including but not limited to homes, apartment buildings, shopping centers, commercial buildings, factories, condominiums, leases of 30-years or more, quarries and oil fields. All types of real property are exchangeable for all other types of real property. In general, state law determines what constitutes Real Property. for like-kind propertyProperty that is exchangeable with another property. Refers to the nature or character of the property and not to its grade or quality. (1031 exchangeThe sale or disposition of real estate or personal property (relinquished property) and the acquisition of like-kind real estate or personal property (replacement property) structured as a tax-deferred, like-kind exchange transaction pursuant to Section 1031 of the Internal Revenue Code and Section 1.1031 of the Treasury Regulations in order to defer Federal, and in most cases state, capital gain and...) and then later transfer it into a REIT using a 721 exchange. This method can offer additional flexibility and tax deferral benefits for the investor.