By: Alejandro E. Jordan, JD
Frequently Asked Questions (FAQs) – 1031 Exchanges (Tax Deferred Exchanges) for Commercial Real Estate
Question 1: What is the difference between a sale and an exchange?
Answer 1: A sale is an exchange of real property for cash. An exchange is a transfer of property for other like-kind property – a “non-taxable” sale.
Question 2: What provisions are required in a Purchase and Sale Agreement to enter into an exchange?
Answer 2: A Purchase and Sale Agreement should contain language establishing the exchangor’s intent and notifying the buyer of the exchange. Examples are:
When Selling:
“It is the intent of the Seller to perform an IRC Section 1031 tax deferred exchange by trading the property herein with [_________________]. Buyer agrees to execute an Assignment Agreement at the request of Seller at no additional cost or liability to Buyer.”
When Buying:
“It is the intent of the Buyer to perform an IRC Section 1031 tax deferred exchange by trading the property herein with [_________________]. Seller agrees to execute an Assignment Agreement at the request of Buyer at no additional cost or liability to Seller.”
Question 3: Can an investor trade from several small properties into one large one?
Answer 3: Yes. An investor can also trade out of one large property into several smaller ones. When selecting more than one replacement property, investors must adhere to the Treasury guidelines regarding property identification.
Question 4: Can an investor take some of the cash and exchange the remainder?
Answer 4: Yes. Any cash received will be subject to capital gains tax. If done properly, this won’t affect partial deferment.
Question 5: Can an investor receive cash from refinancing their property?
Answer 5: Refinancing is a non-taxable event if done correctly. Please call for details.
Question 6: Can an investor carry back a note on their property?
Answer 6: Yes. There are several different ways to handle a note in an exchange. Tax or legal counsel should always be consulted whenever an investor carries a note.
Question 7: Can a partnership, L.L.C., corporation or trust perform an exchange?
Answer 7: Yes. These entities can all exchange property they own for different property.
Question 8: Can an investor trade out of a partnership?
Answer 8: Partnership interests generally are considered personal property and therefore do not qualify as “like-kind.” If one partner wants to exchange separately they should consult their counsel to avoid triggering a taxable event. Please contact us for more details.
Question 9: Can assets other than real estate be exchanged?
Answer 9: Yes. Taxes can be deferred using IRC Section1031 on most personal property including, but not limited to, businesses, planes, boats, trucks and equipment. Call for a free consultation.
Question 10: Can an investor cancel the exchange whenever they want?
Answer 10: The Exchange Agreement allows cancellation under certain circumstances, however, limits must be set. Having the right to cancel without restriction would be construed as control of cash which would disallow the exchange.
Question 11: Can an investor build or improve a replacement property?
Answer 11: Yes. The Regulations describe this as a construction or improvement exchange. Contact us to make sure to stay within the safe harbor guidelines.
Question 12: Does an investor need to hire an attorney?
Answer 12: It is always advisable to have your counsel review any contracts/exchange documents prior to signing.
About the Author
Alejandro E. Jordan is the Chair of the Jordan Pascale, PL’s Commercial Real Estate Law Group, and a licensed commercial real estate professional with over a decade of experience in the business of real estate, finance, development and marketing. His broad base of knowledge allows him to stay ahead of the game and keep abreast of the latest market trends.
