If you or your clients are looking to defer paying taxes on investment property this year, a 1031 may be a great solution.
What is a 1031 exchange?
In Illinois, real estate investors use 1031 exchanges to defer capital gains taxes by reinvesting their real estate sales profits. As long as the proper procedures are followed, the IRS will recognize the transaction, not as a sale and purchase, but as an exchange of a relinquished property for a replacement property.
So simply put, a 1031 exchange is a sale + a purchase = a tax deferral — and any type of investment real estate qualifies. Rental property, apartment buildings, commercial property, farmland, vacant land — if you’re selling any of those investment assets this year, you may qualify.
Rules and guidelines for a 1031 exchange
There are some rules you have to follow in order to successfully complete a 1031 exchange.
- You have to buy property that’s equal or greater in value to the property that’s being sold, and
- You have to use all of the proceeds from the sale towards the purchase
- You need to hire a qualified intermediary
There are also some time periods you need to be aware of. Both time periods start taking place the day the sale closes.
- You have 45 days from the closing of the sale to identify a new property, and
- 180 days from the closing of the sale to purchase one or more of the identified properties.
You also have to maintain taxpayer continuity. That means the taxpayer selling the old property has to be the same taxpayer buying the new property. The last rule, hiring a qualified intermediary (like IPX1031) is important.
Qualified Intermediary (QI)
The main role of the qualified intermediary in the transaction is to hold the funds between the sale of the old property, and the purchase of the new property. The QI also drafts all of the 1031 documents and forms, and provides guidance along the way.
Common questions about 1031 exchanges
One of the most common questions investors and realtors have about 1031’s is :
‘Do I have to buy the new property in the same name as the property that I sold in?’
And the answer to that is no! The 1031 rule is that the taxpayer has to be the same, not necessarily the title holder. So if you’re selling property in your individual name, you could buy the new property in a:
- Land trust of which you are the sole beneficiary
- A single member LLC of which you’re the sole member
- Or any type of disregarded entity
How can ARK Attorneys help you navigate your 1031 exchange?
ARK Attorneys has 15+ years of experience in real estate, sales, and transactions. We’ve built an expansive ecosystem of trusted partners and qualified intermediaries like our friends at IPX1031 to guide our clients in the right direction. Contact us today for more information. 312.753.3142