While there have been opportunities to take advantage of tax benefits during the sale of property dating back to the early part of the last century, until the past couple of decades the regulations were so obscure as to preclude there use by many businesses and individuals. That changes in the past couple of decades with the introduction of guidelines to make the benefits more accessible. The 1031 exchange is now used on a relatively wide basis as an effective means to sell and acquire assets while deferring the tax consequence of the sale.
The advantages of this program are numerous. Businesses and individuals can use an exchange to diversify, consolidate or leverage their portfolios.
Types of property that are covered
The types of properties that qualify for the 1031 treatment are numerous, and they include single family rentals, farms and ranches, offices and commercial space, motels and hotels, golf course, certain recreational properties, multi family rentals and raw land. The exchange benefit is triggered when there is a like kind exchange of one of these properties for another. And, significantly, the values or grades of the property do not have to similar in order to qualify for the favorable tax treatment when it is business property that is being exchanged.
The rules for personal property are different and stricter. In order to qualify for the tax benefit, properties exchange must be of a similar grade. The types of property that qualify include: livestock of the same sex, automobiles, buses, corporate aircraft, doctor practices, manufacturing equipment, restaurant equipment and so on.
Types of exchanges that are used
Beyond this, there are different types of exchanges, as defined by the relative timing with request to the relinquishing and acquiring of assets. There are delayed changes, for when there is a time delay between the release of one asset and the acquisition of another. There are also reverse exchanges, which occur when the replacement asset is acquired before the relinquished asset is sold. Improvement exchanges are used when the exchanger uses the proceeds from a sale to improve existing property. And, a simultaneous exchange occurs when both the relinquished asset and the acquired asset are sold at the same time.
Seeking professionals is crucial
Even the simplest of these exchanges requires the use of qualified and experienced professionals. Look for those that are have earned accreditation. There are numerous companies that specialize in 1031 exchanges, including IPX, Orexco and others. In addition to hiring qualified accommodators, these companies also provide important guarantees. The companies guarantee the transfer of funds for as much as up to $100 million. The provision of this type of guarantee is important to look for when you are evaluating a 1031 exchange facilitator company to work with on these transactions.
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