The Basics - a 1031 Tax Deferred Exchange allows an owner of investment real estate or business personal property to sell their property and buy qualifying, “Like-Kind” property without paying Capital Gains Tax on the transaction. Three conditions apply to qualify for the deferral of Capital Gains Taxes these are: 1. Properties exchanged must be of qualified, “Like Kind”.         Like-Kind Real Property – to qualify for tax deferred exchange treatment under 1031, the Relinquished Property must be exchanged for Replacement Property that is of “Like-Kind”.  “Like-Kind” refers to the nature or character of the property in real estate and not to its grade or quality.  Examples of Like-Kind Real Property Exchanges include:

Raw Land for rental property   Single family rental for multi-family rental   Residential for commercial   Oil and gas and other mineral interests for other oil and gas mineral interests (subject to limitations concerning mineral classifications.)

Like-Kind Personal Property – to qualify for tax deferred exchange treatment under 1031 the Replacement Property must be of like Asset Class or the same Product Class.  Furthermore, to qualify for an exchange the Exchanger must have held the Relinquished Property for “productive use in a trade or business”, and must intend to do the same with the Replacement Property.  Examples of Like-Kind Personal Property Exchanges include:

Business twin engine aircraft for a business jet.   U.S. Coin collection for a Mexican coin collection.   Livestock of the same sex (different sexes are not of Like-Kind).   Investment quality automobiles, 1932 Rolls Royce for a 1932 Ferrari (if they are not inventory for a dealer of the Relinquished Property).

2.  There must be an actual exchange, not a transfer of property for money only. 3.  Time requirements must be followed strictly in a Delayed Exchange. Use our Exchange Deadline calculator button (Left Menu) and we will estimate the required deadlines.   Exchange Period - The Exchanger must receive the Replacement Property within the earlier of 180 days after the date on which the Exchanger transferred the first Relinquished Property or the due date (including extensions) for the Exchanger’s tax return, for the tax year in which the transfer of the first Relinquished Property took place. Identification period – The Exchanger must identify the Replacement Property to be acquired within 45 days of the transfer of the first Relinquished Property.    As many as 3 properties may be identified as Replacement Property (Subject to the 200% limitation).   Not all Identified Replacement Properties must be acquired. Economic Impact of Sale versus 1031 Exchange of Real Property: Illustrated below is the application of a 1031 Tax Deferred Exchange: An Investor exchanges an office building in Houston Texas valued for $17 million with no debt for a $21 million apartment building in San Antonio Texas. A Tax Deferral of $1.050 million can be used to purchase substantially more Replacement Property.   Sale Exchange   FMV of Office Building Basis Gain Recognized Capital Gains Tax Deferred Capital Gains Tax Cash Available for Reinvestment $17,000,000   10,000,000     7,000,000     1,050,000                 0 $15,950,000 $17,000,000   10,000,000                 0                 0     1,050,000  $17,000,000 * Deferral of tax in connection with recapture of depreciation has not been included in the illustration and may be available based on the specifics of each transaction.

Types of Exchanges: Simultaneous Exchange: The Exchange of the Relinquished Property for the Replacement Property occurs at the same time. Delayed Exchange: Occurs when there is a time gap between the transfer of the Relinquished Property and the acquisition of the Replacement Property and is subject to strict time limits.  Build to Suit: Also known as an Improvement or Construction Exchange. This method allows the exchanger to build on, or make improvements to, the Replacement Property using the Exchange Proceeds. Reverse Exchange: this occurs when the Replacement Property is purchased prior to transferring the Relinquished Property. Personal Property Exchange: Exchanges are not limited to real property. Personal property can also be exchanged for other personal property of Like-Kind or Like-Class which were previously discussed. FEDERAL EXCHANGE SERVICES, LLC cannot provide advice regarding specific tax consequences as every Section 1031 Exchange transaction is different. Therefore, the application of the principles discussed herein will depend on the specific facts of each transaction. Accordingly, prior to entering into any exchange it is advised that the Exchanger consult their attorney or tax advisor to determine how an exchange may best be structured to accomplish the Exchanger’s specific goals., 1031 exchange, San Antonio TX, 1031 tax, San Antonio, 1031 tax deferred exchange