What is a tax-deferred exchange? Also known as a 1031 exchange, a tax-deferred exchange allows real estate investors to delay paying capital gains taxes on sale of investment property as long as conditions are met.
To take advantage of a 1031 exchange in Phoenix, an investor must purchase qualifying property which is of like-kind to the property being disposed of. Does this mean if you sell a strip mall, you must buy another strip mall? NO!
Like-kind property in a 1031 exchange is broadly defined by the IRS, which is great news for investors, such that all US real property is like-kind to all other domestic real property. Here are examples of qualifying properties that can be exchanged:
Raw land or farm land for improved real estate
Residential, commercial, industrial or retail rental properties for any other real estate
Rental ski condo for a 3-unit apartment building
According to the IRS, relinquished and replacement properties must be held by the 1031 exchanger either for investment purposes or for productive use in business.
Timing in a 1031 exchange is very important, so an investor must identify the like-kind replacement property within 45 calendar days of selling their current property and close on the replacement property within 180 calendar days of selling current property.
Be sure to avoid boot, which typically refers to the 1031 exchangers cash proceeds left on hand after the exchange. This occurs when the replacement property is bought for less than the proceeds from sale of the relinquished property and boot is subject to capital gains tax. To avoid this simply purchase like-kind replacement property with a value equal to or greater than the value of the relinquished property.
As a realtor, I have completed 1031 exchanges with my clients and due to the complexities of closing a successful 1031 exchange, I am often asked for a recommendation: IPX 1031 as a highly-qualified intermediary to handle your tax-deferred exchange anywhere in the US.
