What Do Investors Know About IRS 1031?
While most investors do know what an IRS 1031 is and what the major benefits are, many do not realize that there are also some lesser known advantages to this code. One of the additional benefits is a reverse exchange, which is a relatively recent development that allows investors to purchase a replacement property and then sell their existing property within 180 days. However, since the investor may not actually hold the title to both properties simultaneously, a Qualified Intermediary will hold the title to one of them, making this kind of exchange more expensive than a standard 1031 exchange. This can be advantageous in a market where properties are selling quickly, as potential replacement properties identified in the standard forward exchange are snapped up by other buyers.
If an investor buys a replacement property of lesser value that the one being sold, then this is called a partial exchange and the investor must pay the relevant tax on the difference in property values. This type of 1031 properties exchange provides flexibility for investors who only want to reinvest part of their capital gains into new, "like kind" property.
An IRS 1031 may also be completed by an investor with US real estate investment property in a few unique ways that still allow the property to be considered "like kind." Oil and gas investments and water and mineral rights are a few of the avenues that might be allowed as a 1031 exchange, as well as TIC (tenant-in-common) investors that share a fractional part of a large commercial building.
There are also times when foreign exchanges are considered to be "like kind" properties, such as when the investor exchanges a foreign property for another foreign property. For instance, exchanging a French property for a Canadian property would be allowable, whereas exchanging a U.S. property for a Canadian property would not.
Another 1031 like kind exchange that can be used to take advantage of the IRS 1031 code is called an improvement exchange, or as it is also known, a build-to-suit or construction exchange. A QI will hold the title on a replacement property purchased by the investor for an amount less than the value of the property they are selling. The owner then has 180 days to make repairs and improvements that will bring the value of the replacement property up to par, enabling the investor to take advantage of the entire tax deferral amount.
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