1031 Exchange: An Overview
When it comes to leasing properties for your business or organization, it’s important to consider specific measures you can take to maximize your investment in any commercial real estate endeavors. A 1031 exchange is a particular leasing regulation which allows a business to profit from exchanging one property for another if carried out properly. Gain accurate insight into the details of 1031 exchanges so your business can improve the outcomes of your commercial real estate investments.
What is a 1031 exchange?
In section 1031 of the tax code, the IRS outlines a principle regarding commercial real estate which allows investors of commercial property to transfer ownership from one space to another without having to pay taxes. Within the provisions of a 1031 exchange, an investor can sell the original property and use the profit to purchase a replacement property of like-kind value all while remaining tax-free. Ideally, a series of 1031 exchanges can allow businesses to make real capital gains on their commercial real estate property by exchanging properties that increase in value over time.
How does a 1031 exchange work?
Under a 1031 exchange, commercial property owners can essentially swap a property for another space by reinvesting the profits made from the original sale to purchase the replacement property. There is no limit to the amount of 1031 exchanges a singular property owner is permitted overtime, which allows investors to significantly increase the net worth of their investments tax-free. Not only does the value roll over from one space to the next, but the property’s worth generally increases. When an investor eventually decides to sell the final property for cash, the profit should be much higher than the amount the first space was purchased for.
What are the considerations of a 1031 exchange?
1031 exchanges have multiple rules and requirements to ensure the details are carried out properly, and at times these regulations can be cumbersome to maintain. Investors should partner with a commercial real estate expert to maximize their 1031 exchange profit.
To qualify as a 1031 exchange, an investor must swap the original property for that of similar assets and value. Additionally, if the investor is not ready to purchase the replacement property immediately after the original property is sold, an intermediary must collect the cash until it is used to buy the new space so the investment can remain tax-free.
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