1031 Exchange Basics in Minneapolis

Selling A Business Property & Deferring Capital Gains

Most mainstream real estate agents aren’t familiar with the 1031 Exchange program and its ability to allow you to defer capital gains, mainly because it hasn’t been used as commonly as it was the past. But that’s changing and it’s making a comeback. Investors wanting to keep more of their dollars on the sale of business or investment property are becoming reacquainted with this old way of doing just that

What Is A 1031 Exchange?

When business or investment property is sold at a profit, the IRS will naturally want its share of your gain. You can defer this tax (not cancel it) if you participate in a 1031 exchange. 

So, what is it? The Federal Government loves to name their “kids” after the section of the federal code that conceived them. Thus, the 1031 Exchange is a product of Internal Revenue Code, Section 1031, which states that an investor who sells an investment or business asset in a 1031 exchange can reinvest the proceeds from the sale in a like-kind property and defer capital gains taxes. Those won’t be due until the asset is sold for cash.

What Are “Like-Kind" Exchanges Under IRC Code Section 1031?

The IRS explicitly mentions “like-kind” exchanges. Now this doesn’t mean that you’ll need to swap a duplex for another duplex. In fact, the IRS states that “real property that is improved with a residential rental house is like-kind to vacant land.” As long as you go from one investment property to another you’ll be ok. The exception in real estate is that property outside the United States is not considered like kind to property within the United States.

How Does A 1031 Exchange Work?

It’s complicated and, yes, there are many rules. It can also be accomplished in several ways. The easiest of these is the simultaneous swap, when the owner of the property you want is interested in acquiring yours. This doesn’t happen often, however, and a more likely scenario is that you’ll need to shop around for a replacement property. 

Typically you will sell your asset, place the proceeds with an intermediary and then purchase the replacement property. You’ll have 45 days after the sale of the original asset to identify up to three possible replacement properties (as long as you actually close on one of them within 180 days of the sale of the original property). 

There’s a lot more to know about the 1031 exchange and we’re happy to bring you up to speed. Read more about 1031 Exchanges HERE.

Planning on selling a commercial property in Minneapolis? Let the Kris Lindahl team advise you how you can avoid capital gains with the 1031 Exchange. Contact us today.