Tax-Deferred Sales

1031 Exchanges

A 1031 Exchange, also known as a Like-Kind Exchange, is a way of structuring a sale of certain kinds of property pursuant to Internal Revenue Code (IRC) Section 1031 so that the seller’s profit or gain is not taxed at the time of sale. The condition for this benefit is that the property that is sold be replaced with another “like-kind” property. If the transaction is properly structured, the tax on the seller’s profit or gain is deferred to a future date.

The sale of the relinquished property and the acquisition of the replacement property do not have to be simultaneous. A nonsimultaneous exchange is sometimes called a Starker Tax Deferred Exchange (named for an investor who challenged and won a case against the IRS). For a nonsimultaneous exchange, the taxpayer must use a qualified intermediary, follow guidelines of the IRS, and use the proceeds of the sale to buy more qualifying, like-kind property. The replacement property must be identified within 45 days after the sale of the old property, and the acquisition of the replacement property must be closed within 180 days of the sale of the old property.

Tenants-in-Common Exchanges

Tenants-in-Common (TIC) ownership is a form of real estate ownership in which two or more persons have an undivided, fractional interest in the asset, where ownership shares are not required to be equal, and where ownership interests can be inherited. Each co-owner receives an individual deed at closing for his or her undivided percentage interest in the entire property. Although the TIC ownership form has been used for many years, its popularity has been increasing dramatically due to a 2002 IRS ruling that greatly expanded the pool of available properties. Exchangers often have difficulty locating and closing suitable replacement property within the 45-day identification period and the 180-day closing period. An exchange into a TIC interest can address these issues. In addition, a 1031 TIC structure can allow investors to pool their resources and purchase larger, higher-valued and better-positioned properties than they might otherwise be able to acquire. Typically these more prestigious properties can also open doors to high-quality tenants, such as Fortune 500 companies and government entities, reducing tenant credit risk. Real estate firms (sponsors) organize the TIC-owned properties with professional management, removing day-to-day ownership concerns.