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What to Know About Key 1031 Exchange Revenue Procedures and Rulings
A 1031 exchange allows you to “swap” real estate used for investment or business purposes and acquire other like-kind properties. When handled correctly, the process can help you defer capital gains taxes and depreciation recapture on the sale of your real estate asset.
Using a 1031 Exchange for Renovations, Built-to-Suits, and Improvements
Internal Revenue Code Section 1031 outlines specific regulations to help you defer tax payments on the sale of real estate for investment or business purposes. Different types of exchanges also provide flexibility, depending on your circumstances. One of these is the improvement, build-to-suit, or construction 1031 exchange. Through this process, you can still swap a relinquished property for a replacement property as long as you follow the IRS rules. Additionally, renovations are involved, which can impact costs and deadlines.
Understanding the 1031 Exchange Five-Year Rule
In most cases, you can’t use a 1031 exchange to defer capital gains taxes and depreciation recapture on primary residence sales. This is because primary residences don’t fall under the category of real estate used for investment or business purposes.
1031 Exchange Basis: What it Is, How it Works
A 1031 exchange lets you exchange your investment real estate (relinquished property) for another of equal or greater value (replacement property). The main benefit of the exchange is that you could defer payment on capital gains taxes and depreciation recapture.
Selling a 1031 Exchange Replacement Property
One significant benefit of a 1031 exchange is that you can indefinitely exchange real estate and defer capital gains taxes. However, taxes are deferred, not eliminated, unless the property is held until death, at which point heirs may receive a step-up in basis, potentially avoiding capital gains taxes altogether. As long as you find the right property, you could continue to generate tax-advantaged benefits through this process.
The Impact Of UPREITs On Real Estate Developers
In the past, real estate developers earned money by collecting rent on completed properties or selling them. In recent years, 26 U.S. Code § 721—“Nonrecognition of Gain or Loss Contribution”—has offered property owners and developers different real estate financing methods.
Can Real Estate Bootstrapping Be Used in a 1031 Exchange?
Real estate bootstrapping is generally associated with startup funding. However, bootstrapping could help drive a 1031 exchange, especially if you need extra liquidity to acquire a replacement property in exchange for a relinquished one. Bootstrapping might help you complete an exchange without adding the complexity of loans or outside investors.
How Long Do Triple Net Leases (NNN) Last?
Triple-net leased (NNN) properties can be suitable investments if you’re looking for real estate that offers potentially stable cash flow and minimal management. This is because a triple net tenant is responsible for property taxes, insurance costs, maintenance expenses, and rent.
What Contractual Language Should Be Added For a 1031 Exchange Purchase and Sales?
A 1031 exchange allows you to reinvest proceeds from the sale of investment real estate into another like-kind real estate property of equal or greater value. When performed correctly, the exchange can help you defer capital gains taxes and depreciation capture on the sale.
The Tax Benefits of Combining UPREITs and Estate Planning
If you’re contemplating retirement or want to transfer your wealth to future generations, estate planning is integral to your long-term strategy. And if investment real estate is part of that wealth generation, contributing your property to an Umbrella Partnership Real Estate Investment Trust or UPREIT can help you achieve current investment objectives while passing along potential tax advantages to your heirs.
