Wealth Opportunities in Commercial Real Estate: Management, Financing, and Marketing of Investment Properties

Section 1031 Exchange

As discussed earlier, if you sell real property, the gain on sale is taxable; it is similar to selling any other type of property, such as stocks, bonds, or widgets. Notwithstanding this statement, if you fall within an exemption, the gain on sale may be deferred. Compliance with Section 1031 of the IRC allows a taxpayer to shift profit or loss to a future date.

The IRC provides that if you go from one commercial real estate investment to another commercial real estate investment, there is no taxable event at that time since, in essence, you have not cashed out but have merely traded one real property asset for another real property asset. This is referred to as a Section 1031 exchange. Section 1031 refers to the section of the IRC that outlines the steps that must be taken to qualify for the tax deferment.

When an exchange is a fully qualified Section 1031 reinvestment, all of the profit in the property sold or exchanged is tax deferred. The profit on the sale of the property is transferred, untaxed, to the replacement property. The result is that the cost basis in the property exchanged is carried forward to the replacement property acquired in the exchange.

Rule Number 15

It is always better to defer taxes rather than to pay them now, provided the exchange transaction makes economic sense.

An exchange can occur simultaneously wherein one property is traded for another property, but usually there is a delay between the settlement date of the property being ...