1031 Exchange, The Basics

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Generally you cannot go wrong in an exchange if you remember the simple rule that “You must trade equal or up in equity and/or debt”. You may do a deferred exchange, but you must identify qualified replacement property within 45 days of the date you close on your relinquished property. You must actually close on the acquisition of the identified property within 180 days of the date you closed on your relinquished property.

You can complete an exchange as long as the relinquished property and the replacement property meet the definition of “like kind”. “Like kind” means the properties must be held for investment purposes or productive use in a trade or business (income producing). Basically, “like kind” property is any property not used as a personal residence. “Like kind” property may include leasehold interests of 30 years or more in duration, conservation easements, water rights, timber rights and mineral rights. Personal property exchanges are more specific in what is “like kind”, but can also be successful in completing livestock, equipment and vehicles.

In addition to the basic issues in each exchange, exchanges may have some especially complicated issues or traps for the unwary. Forgotten depreciation may lower the basis even more than originally thought or be subject to recapture. Related party ownership may create additional holding requirements. Property used for both personal residence and business or investment purposes may require some extra thought with regard to deal structuring. The 45 day identification period and the 180 day window for completion of the exchange can require some extra attention to detail. Building improvements on the replacement property may require extra work. Constant changes by the Tax Code regulations and other IRS and Treasury guidance requires that your exchange company be “up to speed” on the changes.

About the Author

Dwaine L. Clarke is the Founder and President of GCT Net Lease. GCT Net Lease is an investment real estate services firm exclusively focusing on Single and Mult-Tenant Net Lease Properties. The firm provides a full range of brokerage and advisory services nationwide to High Net worth Investors, Developers, REITs and Institutional Investment Funds. GCT Net Lease is headquartered in Windsor Connecticut. Dwaine is also a nationally recognized speaker and consultant. He is also the author of three best selling commercial real estate investing books. Mr. Clarke’s experience branches through close to over a decade of working with and for some of the nation’s top investors to purchase, underwrite, develop and manage millions of dollars in commercial investment real estate. For his case, he has not only assisted these investors, but also became a student of theirs. Through careful analysis he started to understand what these investment experts were doing, using top strategies to buy, manage and sell their investment properties for maximum profit. He especially took note of how these investors were leveraging their time and how they made their decisions without interfering with their personal or business lives. Mr. Clarke is also active in investing and creating real estate partnerships, providing a vehicle for high net-worth individuals to own income producing real estate.

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