SREI Group

Alternative Investments & Wealth Management

Glossary

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1031 Exchange

The Internal Revenue Service code 1031 exchange, also known as a like-kind exchange, is a tax-deferred transaction that allows real estate investors to sell one property and reinvest the proceeds in another property of equal or greater value, thereby avoiding capital gains taxes on the sale. This exchange encourages real estate investment and stimulates the economy by allowing investors to defer taxes and reinvest in new properties.

To qualify for a 1031 exchange, the properties involved must be considered “like-kind,” meaning they are similar in nature and use. For example, an investment property can be exchanged for another investment property but not for a primary residence. Additionally, the investor must follow strict guidelines and timeframes for identifying and acquiring the replacement property.

There are several benefits to utilizing a 1031 exchange, including the ability to defer taxes, increase cash flow and equity, and diversify a real estate portfolio. However, it is essential to consult with a qualified tax professional and real estate attorney to ensure compliance with all IRS regulations and maximize the benefits of the exchange.

If you are considering using the 1031 exchange tax mitigation strategy, you must seek out a Qualified Intermediary (QI) in advance. Some guidelines and procedures must be in place before the final sale. There is also a strict set of dates prescribed by the Internal Revenue Service that require adherence.

Types of Exchanges

  • Delayed Exchange (by far the most common)
  • Improvement Exchange
  • Reverse Exchange

At SREI Group, we can work with the client’s QI to affect the purchase; however, we don’t endorse any. Please note that the Qualified Intermediary industry is not regulated, and there have been instances where investors’ money has been lost. The list below includes a few of the largest firms for your consideration. It is recommended that you do your research. Each of these companies has a very extensive collection of website articles and checklists.

You will also find a wealth of information about the Qualified Intermediary industry at the Federation of Exchange Accommodators. www.1031.org